When high-asset couples divorce, the likelihood of spousal support factoring into the process is high. Because of the tax reform law passed last year, how this support affects income taxes will change.
If you are seeking a divorce and will either be paying or receiving alimony, one question you likely have is “will I have to pay taxes on this income?” If your divorce is finalized this year, the answers is yes if you are the recipient and no if you are the payer. If you finalize your divorce after December 31, 2018, the inverse is true.
The Tax Cuts and Jobs Act (TCJA) changed the 75-year standard set by the Revenue Act of 1942, which established that spouses who pay alimony should not have to include those funds as taxable income.
However, there is historical precedent for the change. The 1917 case Gould v. Gould brought the issue of alimony in front of the U.S. Supreme Court, in which the justices ruled that recipients of alimony were protected under the law from paying income taxes on those payments. The TCJA simply reverses the Revenue Act of 1942 and goes back to the standard set by the Supreme Court.
Messing with alimony makes for messy splits
As the end of the year approaches and fewer couples finalize their divorces under the old tax standard, there is a risk for the process to become contentious quickly. Couples will need to consider these tax changes and all the state expectations normally associated with a divorce.
However, with the right preparation and attention to detail, couples can still navigate the spousal support process to create a plan that allows both parties to have fulfilling financial lives after divorce.