The Tax Cuts and Jobs Act (TCJA) reforms the U.S. tax code and turns traditional estate planning for couples on its head by changing the way the IRS will treat alimony payments between divorcing couples beginning on Jan. 1, 2019.
Under current law, payments of spousal support are deductible by the payer and taxable as income to the recipient. However, when a couple enters into a divorce or separation agreement after Dec. 31, 2018, the payer will no longer be able to decrease his or her taxable income and claim a tax deduction for alimony payments. Moreover, alimony recipients who are often in a lower tax bracket will no longer bear the burden of paying taxes on those amounts they receive.
This change could result in higher combined tax liabilities, and more of divorcing couples’ money going to the government, until 2026, when this provision is set to expire. It may also make divorce negotiations more difficult in light of other provisions included in the TCJA, including the elimination of the dependent deduction.
With the new law’s treatment of spousal support, it is very possible that high-net worth spouses considering divorce may feel a sense of urgency and expedite their plans to get an agreement finalized in 2018 to take advantage of the tax break available to them under current law.
In light of these new regulations, couples should consult with professional advisors to understand and address what impact it will have on former spouses’ future income and tax liabilities. It may also require married couples to consider implementing different strategies to offset the potentially negative tax impact of the new law. Civility and careful planning may be the best course of action in an already potential difficult situation.
About the Author: Scott Montgomery, CLU, ChFC, is a director with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
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Scott Montgomery is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
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