Divorce is not a pleasant subject to contemplate, and the impact of divorce on your taxes can add further complexity to situations that are already daunting enough. The broadest federal tax code revision in decades, the Tax Cuts and Jobs Act of 2017, has brought changes to the tax laws which impact divorced couples — particularly for couples with large earning differentials between the spouses.
For decades, alimony paid to spouses has been tax-deductible. Depending on the wage gap between spouses and the amount of alimony paid, a hefty tax break was possible.
After December 31st, 2018, couples who finalize or modify divorce agreements are no longer permitted to claim, as tax deductions, the alimony paid to former spouses. In the case of couples with one spouse earning vastly more than the other, the financial implications are so significant that some are already exploring strategies to help offset the tax hit.
Prior to December 31st, 2018, spouses who pay alimony — regardless of the amount — can deduct this payment from their earnings to reduce the taxes levied on these earnings. For wealthy Americans, who constitute the largest demographic to deduct alimony (the top 5 percent of earners claim about 20 percent of all alimony deductions), the prior tax law may have incentivized the spouse paying alimony to agree to a higher payment, since it could also result in a significant tax deduction for the payer.
When the changes to this part of the tax code take effect in 2019, this benefit will disappear. Analysts predict that higher-earning spouses may leverage the new tax law to help make a case for lower alimony payments.
Some analysts have speculated that this pending change to the tax code may fuel a disproportionate number of divorces in 2018 as some couples race to dissolve their marriages prior to the new law taking effect, official statistics do not yet shed light on whether a spike in divorce rates is occuring or not.
Since the 1980s divorce rates have fallen. Proponents of marriage speculate that in the long term the new law may marginally lower divorce rates, since it is wives, more often than husbands, who are financially less advantaged and less likely to pursue a divorce under laws that will make it more likely that their economic status will be adversely affected.
If nothing else, the new law introduces a point of contention into negotiations that are often fraught with conflict, making equitable divorce settlements that both spouses feel good about even more challenging to achieve.
Though it may be hard to keep up with changes to the tax law and to make sense of what they mean for your tax situation, at E-file.com we make it easy and efficient to to determine which deductions you qualify for. With free, on-demand, professional tax assistance just a click away, you can feel confident about successfully filing your tax return.