Divorce and the New Tax Law

 Posted on May 09, 2018 in Spousal Support

Late last year, Congress passed the Tax Cuts and Jobs Act, which made significant changes to the deductibility of alimony payments. The recent amendments could have a serious impact on Texas couples who finalize their divorces next year, so if you are considering filing for divorce, it is critical to contact an experienced high asset divorce attorney who can explain the legal ramifications that the new law could have on your own divorce.

Alimony Basics

Except in specific circumstances, the amount of alimony that a former spouse can receive in Texas is capped at:

• Twenty percent of the paying spouse’s gross monthly income; or
• $5,000 per month.

There are also limits as to how long a spouse can receive alimony. For instance, when a marriage lasts longer than ten years, but fewer than 20 years, the receiving spouse is only eligible to collect spousal maintenance for five years, while marriages that lasted for at least 20 years, but less than 30 years are limited to seven years of alimony.

Finally, spouses who were in marriages of more than 30 years can receive spousal maintenance for ten years. In some cases, couples are able to avoid these limits by coming to out-of-court settlements regarding the amount of alimony that a lower earning spouse will receive, as well as the duration of payments.

Contractual Alimony in Texas

Before the passage of the new tax law, higher earning Texas spouses who were going through a divorce could agree to contractual alimony and then deduct those payments during tax season. The receiving spouse would then be required to pay tax on the gross amount received from the other spouse that year. However, according to the terms of the new law, taxpayers who get divorced after December 31, 2018 are not permitted to deduct alimony payments from their income. Similarly, recipients will no longer be required to pay taxes on the payments they receive.

This tax law change could have an effect on divorcing spouses during the settlement process, as higher earning spouses may only be willing to make smaller offers of contractual alimony. As a result, spouses may attempt to resolve property division issues by giving more property to the lower-earning spouse instead of opting for a steady stream of alimony. If these assets don’t perform or are mismanaged, the lower-earning spouse could end up being on the hook for any losses, leaving him or her in a precarious financial situation.

Finally, spouses who depend heavily on the tax break they will receive when paying alimony may decide to halt divorce proceedings and remain married, which could make for an extremely unhappy and unhealthy household. Fortunately, all alimony paid before the first of the year in 2019 will remain deductible by the payor.

Call Today for Help with Your Case

Please contact Powers Kerr & Rashidi, PLLC to discuss your alimony-related questions with an experienced Round Rock high asset divorce attorney. We are eager to assist you today.

Source:

https://www.cnbc.com/2018/02/16/loss-of-alimony-tax-break-in-tax-law-may-inflame-divorce-negotiations.html

https://www.congress.gov/bill/115th-congress/house-bill/1