Spousal maintenance payments are historically difficult to figure out in the course of divorce proceedings. Each state has a distinct set of rules surrounding maintenance and is based on a variety of rationale. Because the rationale behind an appropriate amount of payment can be subjective, maintenance can vary and is often used as a bargaining chip to settle a case. After the recent Tax Cuts and Jobs Act (TCJA), determining maintenance payments may have gotten even more difficult.
Under TCJA, the change in treatment of maintenance payments under the Federal Tax Code will take effect in 2019. In all divorces after Dec. 31, 2018, spousal maintenance will no longer be deductible for the payor, and taxes don't need to be paid on it by the payee.
The new changes bring challenges to those who are helping determine what payment is appropriate and have the potential to discourage monthly spousal maintenance payments in general. Some worry that there will be longer divorce proceedings because the bargaining tool of maintenance is more complicated and increase the acrimonious nature of many divorce proceedings.
Because of the 2018 deadline, some dependent spouses may want to draw out finalizing agreements until after 2018 so the payments are not taxable income. The higher earning spouse may want to rush divorce proceedings to settle before the deduction elimination takes effect. In the future, there is a risk that the higher income earner may be unwilling to pay a greater amount because they will not be getting the deduction.
If you are currently in the process of divorce and are looking to make tax deductible maintenance payments to the other party, these tax changes may be an incentive to get your divorce agreement in place and signed by December 31, 2018. On the other hand, if you are going to be the recipient maintenance, the tax changes may be an incentive to put off finalizing an agreement until next year, because the payments would be tax-free income. In either situation, we encourage you to get a deeper understanding of the family's financial situation and the ways that maintenance payments can help the family moving forward. Speaking with a tax professional may help you decide what is best for you.
At Elise Buie Family Law we know divorce can be difficult. The new tax provisions raise many questions about how to proceed. Having an experienced divorce lawyer can make all the difference to your process. Because we focus solely on family law, we understand the dynamics and can help guide you through your divorce. Please contact Elise Buie Family Law Group, PLLC for a free consultation regarding your divorce. Also for more information about collaborative divorce or mediation please visit our website.