The New Tax Laws Are Changing Divorce

Uncontested Divorce Mediation

Posted June 27, 2019

The laws surrounding alimony payments have remained unchanged in the U.S. for over half a century. However, spousal support payments of the future are altering the traditional rules of divorce court. In 2017, President Donald Trump signed the Tax Cuts & Jobs Act, making big changes to the way alimony payments are taxed beginning in 2019.

Alimony payments are spousal support payments made to allow both spouses to maintain the standard of living they are accustomed to. During a marriage, it’s common for one spouse to stay at home and care for children while the other spouse gains further education and establishes a career. Alimony payments work to eliminate a situation where one spouse makes sacrifices that may leave them destitute in the event of a divorce. After an uncontested divorce in Denver, it’s common for the spouse with a higher income to make monthly support payments to the spouse earning less income. In the past, this usually meant a husband paid support to a wife who stayed home to raise a family. However, this standard is shifting as traditional parenting/work roles change.

New Tax Laws

Until recently, alimony payments were tax deductible for the payer and considered taxable income for the receiving spouse. While making monthly payments to support your ex isn’t likely something to ever be gladly accepted, the tax credit encouraged larger payments with the promise of a return when tax time rolled around. Since the payments were tax deductible, this meant the receiving spouse was required to pay taxes on them. However, this arrangement still worked to produce bigger payments overall since the receiving spouse is typically in a lower income bracket, therefore, paying fewer taxes.

Under the new tax laws, alimony payments are no longer eligible for a tax deduction. Since the payer no longer receives a deduction, the recipient collects these payments as non-taxable income. This means the taxes are now paid by the spouse earning the most income (in a higher tax bracket). The result is less money to go around. In fact, this change alone is expected to generate billions of dollars of income tax revenue within the next decade.

How Tax Changes Affect Divorce in 2019

Divorce is always a situation filled with emotion. Resentment surrounding the elements that dissolved the marriage often enter debates concerning the division of assets. In the courtroom, tensions are often elevated and final solutions decided by a judge may not be perfect for either spouse. The new tax laws make these decisions more confusing than ever.

On the surface, the new laws seem to directly benefit the receiving spouse. After all, collecting additional income without paying taxes has to be a good thing … Right?

Not necessarily. In the past, when alimony payments were taxable income, these payments could be added to an individual retirement account (IRA). Since the receiving spouse will no longer be paying taxes on these payments, s/he may not be eligible for a retirement fund. When you add this fact to the already lowered payments affected by taxes, the receiving spouse has considerably fewer assets to carry into the future.

These changes are predicted to heavily impact the number of divorces battling out the division of assets in court. Paying spouses will be negotiating for lower payments to reduce the tax burden while receiving spouses will be aiming for higher payments that go further.

Since children are often involved in these cases, child support payments may be affected as well. Lower alimony payments mean less income to support a family. This difference may be expected to be compensated in the payment of additional child support.

Divorce Mediation Could Ease Financial Burdens

While divorce is never a welcome solution to a marriage that no longer works, it isn’t always unexpected. It’s estimated that 90% to 95% of divorces are uncontested. This means that both spouses agree to a divorce and jointly file to the court. In light of the new tax laws, reaching an uncontested divorce in Denver could offer a big advantage to couples facing alimony payments. A courtroom divorce leaves major financial decisions up to a judge. However, a couple agreeing to navigate a divorce mutually may have opportunities to work toward more cost-effective solutions.

Even when a divorce is uncontested, it’s often difficult for couples to set emotions aside and make agreements regarding every aspect of separate lives. This is where divorce mediation in Denver comes in. A divorce mediator is a neutral third party who works with both spouses to find solutions that treat everyone fairly. When taxes could end up being a burden to both spouses, the division of assets may be resolved mutually by other means.

Since the new tax laws focus so narrowly on alimony, a mediator can help couples consider other forms of payment. The following payments are listed by the Internal Revenue Service as “Payments Not Alimony.” Therefore, they aren’t affected by the new tax laws. 

• Child support
• Non-cash property payments (lump sum or installments)
• Payments to keep up the payer’s property
• Payments that are your spouse’s part of community property income
• Use of the payer’s property
• Voluntary payments that were not required in divorce proceedings.

Couples who have the opportunity to work together to investigate cost-effective solutions in a conference room instead of an emotionally charged courtroom may find suitable alternatives to alimony. Couples who are divorcing amicably, especially those supporting children, may find alternatives that save both spouses money now and in the future. Every living situation is unique, but some solutions may include a lump sum payment, property settlements, or IRA accounts.

Divorce is never easy, but there are ways to make the ordeal less stressful. divorce mediation in Denver is one way to ensure you remain in control of the situation. When a marriage dissolves, it can seem impossible to agree on a future where both parties prosper. However, at Split Simple, we believe that every divorce conflict can be solved mutually in the best interests of both spouses and any children involved. If you want to learn more about a simpler more cost effective way of working through your divorce, contact Split Simple today or give us a call today at 720-501-4600 to schedule your free consultation.

Split Simple

1624 Market Street #202

Denver, CO 80202

720-501-4600