Divorce “Tax Break” Will Soon Be Eliminated
There is never a good time to get divorced, but if you have high assets, you probably will be best off getting one as fast as possible. The reason is the new Republican tax law, which will eliminate the tax break for alimony payments that are finalized or modified after Dec. 31, 2018.
Agreements signed before the end of the year will still qualify for the annual deduction. This can make a big financial difference for wealthy couples where one spouse earns substantially more per year than the other.
The Securities Exchange Commission defines a high-asset or high-net-worth couple as a couple whose net worth exceeds $1,000,000, excluding the value of their primary residence. If you fall into this category, you can have complications and concerns with financial, tax, and other issues that other couples do not face, especially now that the tax laws are changing.
Divorce, dividing property, spousal support and other family law issues are emotionally charged issues that are life-changing for everyone, but particularly so when there are high assets involved. In order to avoid making costly mistakes, it makes sense to consult an experienced family law attorney to help you through this difficult time.
The seasoned and compassionate Illinois family law attorneys at Wolfe & Stec, Ltd. always focus on our clients’ needs and feelings, and we work to clarify and resolve the financial and emotional issues they are facing in the most effective and efficient manner. We offer a free consultation to help you find the best solution for your individual situation. Call or contact us online today for your free consultation.
What are Changes in the Tax Law?
For many years, Americans paying alimony to a former spouse have been able to deduct the payments from their taxes. This provided a generous tax break, especially for those with big payments and a large difference in earnings between spouses. The Internal Revenue Service reports that about 600,000 taxpayers claim the alimony deduction each year.
The current system allows people paying alimony to deduct the payments from their income before calculating taxes. That deduction provides a big benefit to wealthy Americans, especially those at the top tax rate of 37 percent. In the future, they will have to pay taxes on all of their income, including what they pay out in alimony.
Currently, if the person paying alimony earns substantially more than their former spouse, the paying spouse usually agrees to a higher alimony payment because the full amount is deductible from taxes. Without that benefit, high earners are pressured to pay more to support their former spouse.
Also, under the current law, the spouse receiving the alimony payments has to pay taxes on it, but at a lower rate than the high-earning spouse did. The new law allows the spouse receiving the alimony to receive it tax-free, the same as money paid for child support. However, since the alimony recipient earns less than the paying spouse, more money from the couple’s total will go to taxes.
As a result, the paying spouse hit by increased taxes will be able to negotiate lower payments, so future alimony recipients may wind up losing 10% to 15% of what they would get under the current law. Since women usually earn less than their spouse, the new law will hurt them – and their children — the most. The deductibility of unallocated support — payments that are meant to help a divorcing spouse and children at the same time — will also end for any new or modified divorce agreements in 2019.
The Joint Committee on Taxation estimates elimination of the tax break will increase federal revenues by $7 billion over the course of a decade. However, this may not happen, because wealthy individuals can hire professionals to find loopholes to make up for the increased tax. For example, some spouses may choose to forgo alimony payments and instead receive compensation such as real estate, larger shares in tax-deferred retirement accounts or other arrangements that maximize tax advantages.
Divorce experts expect that the law changes will make divorce even more contentious in the future. However, if you finalize your divorce in 2018, you can still take advantage of the currently favorable tax treatment of alimony.
CONTACT US FOR HELP AND A FREE CONSULTATION
In any high-asset divorce, it’s essential to have experienced legal guidance from the very beginning to help you fight for a beneficial settlement and security after divorce. The skilled Illinois family-law attorneys at Wolfe & Stec, Ltd. know the laws, the courts and the system and can guide you through every aspect of your high-asset divorce, including maximizing your tax benefits.
Our attorneys will work closely with you to perform a thorough analysis of your financial and tax situation and will assist you in determining what additional experts may be needed to protect your financial future.
We believe it is best to deal with high-asset issues amicably and settle outside of court if possible. However, if necessary, we will aggressively represent our clients’ interests in court.
Don’t delay. For a free initial consultation with an experienced and compassionate Dupage County attorney, contact us online or call our offices today.