Divorce 2019: What You Need to Know about the New Tax Laws

The holidays are over, and many Bay Area couples will begin working through the details of their Divorces. January historically has the highest number of Divorce filings. The paperwork, parenting plansand division of assets never get any easier. And this year, the changes from the GOP tax plan could add another layer of stress.

Here’s what you need to know if you and your spouse will be divorcing in 2019 or beyond:

1. Changes in alimony payments 

We’ve talked about this in previous articles. Alimony paid will no longer be tax-deductible and alimony received will no longer be taxable income. The results? This could make the divorce process more acrimonious and emotional. High-income divorcing spouses will fight aggressively to pay less alimony because the government will no longer subsidize these payments via the tax deduction. Many worry that this will penalize women, whose income typically falls sharply after a divorce. Lower-income spouses will likely fight to get as much alimony as possible, since the tax burden will be removed and the payments will go further.

2. Modifications to Divorce agreements: People who are already divorced will be grandfathered in

If divorced couples’ Divorce agreements are modified in 2019 or beyond, they could be subject to the new rules as well. If the modification states that it is to be governed by the new rules, then the new rules will apply. If the modification says nothing, however, the old rules will apply. The bottom line: People should be extremely cautious when modifying Divorce agreements in 2019 and beyond.

3. Children are no longer the tax deduction they used to be

The 2017 tax law eliminated the $4,050 exemption for each dependent, through 2025. The child tax credit, however, has doubled from $1,000 to $2,000. Remember, too, that the standard deduction has almost doubled because of the 2017 tax law. Single taxpayers in 2019 will see a standard deduction of $12,000; it was $6,350 in 2017.

4. Pre- and post-nuptial agreements may be affected by the tax changes

The new rules may nullify many of the items in such agreements, so all pre- and post-nuptial agreements should be reviewed by a financial consultant or legal specialist.

Additional tax strategies if Divorce is part of your 2019 plans

• Consider alternative investment/tax strategies. If you are the higher-income spouse, consider giving an Individual Retirement Account (IRA) to the lower income spouse, if applicable, because that shifts the tax burden to the receiver when that IRA is accessed. If you’re the lower-income spouse, you would inherit that burden when you cash out your IRA. Both parties should carefully consider their total tax equations and find the most comprehensive way to benefit financially over the short- and long-term.
• Tax-deferred strategies. Financial planners say some spouses may choose to forgo alimony payments and explore alternativessuch as lucrative real estate, larger shares in tax-deferred retirement accounts or some complex combination of the two that maximizes tax advantages. Options include a Qualified Domestic Relations Order (QDRO) that sets up future payments to a lower-earning spouse from a higher-earning spouse’s retirement account, taxed at the lower earner’s rate.
• Wait for your advisers to get up to speed on new laws and trends.This isn’t a contest; you don’t have to be the first couple to file for divorce in the new year. Your financial adviser will discover patterns and trends and be better prepared to advise you on financial issues if you wait a few months. Let someone else be the guinea pig!
• The benefits of cashing out. You might consider taking (or giving) a lump-sum Divorce payment instead of monthly payouts. This provides the opportunity to invest, pay for home repairs, or simply the ability to move on quickly and have a fresh start.

If your Divorce is uncontested, we can assist you and help you save a significant amount of money. Schedule an appointment today by contacting us at one of our three Bay Area offices. Our dedicated team is helpful, compassionate and affordable.