How The New Changes To The Tax Code Will Affect Your Divorce

In 2017, Congress passed and the President signed into law The Tax Cuts and Jobs Act. This Act created new tax code provisions, which have made more than a few changes to the way Americans file their annual income taxes. Some of these changes, went into effect in the 2018 tax year, like the revamped child tax credit, while others go into effect on January 1, 2019. Many of the new tax provisions that go into effect on January 1, 2019, will affect couples going through divorces in 2019 and for years to come. Some of the most significant tax code changes to affect divorces initiated in 2019 or subsequent years are outlined as follows.

Changes to Treatment of Alimony

In divorce cases, a court or a divorce agreement can require one party to pay the other party alimony. Defined simply, alimony is a court-ordered allowance (or a court-approved allowance if made a provision of a divorce agreement) requiring one spouse to pay the other spouse for maintenance and support for a period of time after the divorce. The purpose of alimony is not to provide one spouse a windfall over the other. Rather, its aim is to allow the low earning spouse time to adjust from married to single life. Awards of alimony are typically discretionary. This means that a judge need not award alimony to a spouse if the judge determines that such an award is inappropriate under the circumstances.

Prior to the 2019 tax year, if a spouse was required to pay alimony to the other spouse after a divorce, the payments were tax deductible to the paying spouse and considered taxable income to the receiving spouse. Under this system, a high earning spouse may be more apt to agree to pay his or her spouse alimony so as to receive this beneficial tax deduction.

However, according to the new tax code provisions that come into effect during the 2019 tax year, alimony will no longer be tax deductible for the paying spouse and will not be considered taxable income for the receiving spouse. This new provision has the potential to dramatically change the bargaining powers between parties during the divorce process because the higher tax bracket spouse is no longer afforded an incentive to pay alimony to the lower tax bracket spouse. Accordingly, it will be harder for the lower tax bracket spouse to get the other spouse to voluntary alimony to him or her after a divorce.

New 2018 Child Tax Credit will Remain in Effect in 2019

While this tax provision affected divorces of couples in 2018 who have children, the new child tax credit will continue to affect divorces in 2019 as well as in years in the foreseeable future. The new child tax credit, which doubled in the 2018 tax year from $1,000 to $2,000 per child, will be awarded to the parent who retains primary physical custody of the children after divorce unless the parties stipulate in a divorce agreement otherwise. Because the new child tax credit is refundable, ancillary custody agreements or stipulations to which parent gets the child tax credit in a divorce agreement can be powerful bargaining chips in coming to a divorce agreement for parents undergoing divorce in 2019.

Some Divorces Finalized Prior to 2019 will be Governed by the Old Tax Code Provisions

All divorces finalized before January 1, 2019, will continue to be governed by the old tax code provisions regarding alimony. Consequently, if a higher income spouse wishes to take advantage of the tax deduction for alimony, it is prudent to finalize all divorces and/or divorce agreements prior to January 1, 2019. Moreover, while divorces finalized before the start of 2019 will be governed by the old tax provisions, if the parties decide to modify a divorce agreement after January 1, 2019, then said modification could cause the divorce, under certain circumstances, to be governed by the new tax code provisions.

Contact a Voorhees Family Law Attorney for a Consultation About Divorce in New Jersey Today

If you are thinking about filing for divorce, or if you have already started the divorce process and are dealing with another matter such as child custody, child support, or division of assets, you need to speak with a qualified attorney. The New Jersey family law attorneys at Davis & Mendelson represent clients throughout the state, including Voorhees, Lindenwold, Haddon Township, Collingswood, and Haddonfield. We understand how challenging this time can be for you, which is why we will fight hard to protect your interests, and the interests of your loved ones, throughout the legal process. Call us at 866-560-9512 or fill out our confidential contact form to schedule a consultation. We have an office conveniently located at 1200 Laurel Oak Road, Suite 101, Voorhees, NJ 08043.

The articles on this blog are for informative purposes only and are no substitute for legal advice or an attorney-client relationship. If you are seeking legal advice, please contact our law firm directly.