A lot of couples as well as financial professionals are doing all they can to obtain written agreement concerning alimony payments before the coming into effect of the new rules on taxes on the 31st of December, 2018. Tax Cuts and Jobs Act which was officially passed in 2017 would change the tax rules regarding alimony.
It is pertinent to note that under the rules existing at the moment, alimony payments fall under the category of tax deductible for the person paying while it constituents taxable income for whoever is receiving the payment. That would no longer be applicable come 2019.
Effect Of Changing Rules
The change obviously overturns the alimony procedures which has been the operative one for over seventy years. Projections have it that it would raise about $6.9 billion for Inland Revenue Services over the course of ten years from now. Those who are being directly affected by these changes asides the divorcing couples are the divorce professionals as a lot of couples are seriously trying to write their agreements as soon as possible.
According to American Academy of Matrimonial Lawyers’ President, Peter M. Walzer, a person who wants the permanent support categories as tax- deductible and also includable need to have an agreement signed before 2018 comes to an end.
As from the 1st of January,2019, the playing field would be leveled for couples that have decided to go their separate ways. Financial professionals have started expressing concerns that deals to be made under these new rules would be disadvantageous to the person at the receiving end of the alimony.
In essence, women who ordinarily are in a position of more financial vulnerability in divorce would likely have even lesser money available to them.
Financial Impact On Women
Studies have shown that women on a general outlook have worse financial performance after divorce. In a research conducted by, Professor Stephen Jenkins, a professor at LSE, their income usually drops by over a fifth while those women with children witness a rise in their earnings by about one third.
The President of Francis Financial, Stacy Francis, stated that she had gotten a lot of calls and also emails from different women who were happy about the change. According to her, they believe getting $3,000 monthly as alimony which would no longer be taxed could turn out as a good thing.
Francis, however, added that even though the women would get alimony that is no longer taxable, there is a high likelihood that the money would be lesser than it already is. Based on the fact that women are the ones who receive alimony payments the most, Francis said they would be the one to get affected the most upon the coming into operation of the new law.
Lesser payments
A divorce calculator indicates that there is a probability for lesser money to circulate after the new law comes into force and that would lead to lesser alimony payments. The tool was developed by the company of Laurence Kotlikoff. Kotlikoff said there is a need for adjustment of alimony to align with the change that has taken place and the change can be dramatic. There are tools that can assist couples in assessing the impact of their division of assets.
The idea behind the change is to level the living standard of both spouses. Kotlikoff said that the lesson is the couples, lawyers, mediators, and courts need to make adjustment as to their splitting of alimony.
A pertinent question at this point is whether prenuptial or postnuptial agreements that have been finalized before the coming into effect of this law would be treated. Francis mentioned that there would be revenue rulings for guiding such situations although they currently don’t exist.
Walzer noted that his practice at the moment is working with a couple that has an already existing premarital agreement stipulating that the maximum of spousal support is $5,000 monthly. As the couple would now enter divorce proceedings, it is left to the court to address the deal as the court could either make a decision that the sum is the limit of dollars that is non-deductible or there could be a reduction since deduction no longer exists.
What is important as couples go through their divorce process is to get professional help. According to the financial advisor, Russ Thornton, he has met several people who want to represent themselves. Thornton, however, mentioned that several benefits accompany getting the help as well as the guidance of an attorney who is a specialist in family law even in a case when you desire to drag the agreement yourself and also present in the court.
