How Taxes Impact the Financials of Divorce
When your marriage is ending, you want to negotiate a divorce settlement that protects your financial well-being. Understanding the tax implications of divorce can help empower you to achieve a decree that positions you for financial success. Here are a couple of things to know.
Beginning in 2019, there are new rules about the tax-deductibility of alimony
The Tax Cuts and Jobs Act (TCJA), intended to simplify the tax code, has impacted divorce in several ways:
• Spousal support paid is no longer tax-deductible. This applies to agreements finalized after December 31, 2018; settlements established beforehand are grandfathered.
• Spousal support received is no longer taxable income. For settlements reached beginning January 1, 2019, alimony payment is federally tax free to the recipient.
• Modifications to divorce agreements may affect tax deductibility. It may be possible to re-negotiate an existing divorce decree to comply with the current code.
• Pre-nuptial agreements may conflict with the new rules. If you have a pre-nuptial or post-nuptial agreement based on the old tax code, it may need to be modified.
Your tax situation will influence your negotiation strategy
Alimony is only one element of a settlement. Your Luma Wealth Advisor can work with you to determine the role that each asset you and your spouse own may play in an agreement, keeping your post-divorce tax situation and your spouse’s in mind. For example, in some situations, it may make financial sense to negotiate for the higher income ex-spouse to provide an Individual Retirement Account (IRA) to the lower income spouse who may be subject to a lower tax bracket.