Will I benefit more from filing for divorce before the new tax code takes effect?

Originally published by Family and Criminal Law Blog.

Will I benefit more from filing for divorce before the new tax code takes effect?

The new tax code will take full effect on January 1st, and several of its provision are anticipated to have a significant effect on divorce. With just months to go before the tax code replaces previous laws, potential divorce filers need to consider whether it is best to wait and plan their divorce to take place after January 1st, or to file quick before the deadline. Which move will be more beneficial depends on several factors unique to your own circumstances.

The Tax Cuts and Jobs Act

The Trump Administration’s Tax Cuts and Jobs Act is set to take effect on January 1, 2019. The law will impact several aspects of tax law, including alimony deductions. Currently, tax laws allow for Americans to deduct monies spent on alimony from their taxes. As of next year, that deduction will be eliminated. This could mean big changes, as over 600,000 people currently claim alimony deductions.

Factors Divorcing Couples Should Consider Before Dec. 31

If you are on the fence about filing for divorce now or later, here are some factors to consider:

1. Alimony: The alimony deduction has existed since 1942. While developed to assist joint taxpayers in the transition to single payers, the deduction was said to have led to the underreporting or over reporting of alimony payments in recent years. Now, the alimony payer will be taxed on all alimony paid, while the recipient will not need to pay taxes. The alimony deduction has long been used in alimony negotiations, often proving important for the lesser earning spouse. If alimony will be at stake in your divorce, it may be wise to consider filing now to preserve the deduction.
2. Prenuptial agreements: Given how long the alimony deduction has existed, it became standard practice for many attorneys to insert a clause into the prenuptial agreement that stated alimony deductions would be made for the paying spouse. Now, it is unclear whether such a clause would be upheld. Couples with a prenup agreement that contains such a clause will want to speak to their attorney about potentially changing the document.
3. Division of the family business: If one or more businesses are at stake in your divorce, you will want to pay close attention to the new tax law. Traditionally, private businesses are valued using their cash flow and earnings. Per the new tax law, businesses could experience an increase in cash flow if they are a pass through entity. This could increase the business’ valuation, which may not be accurate. A business valuation expert may be needed to analyze and fairly value the business, which will cost money.

With so many questions surrounding the new tax law, it is best for any potentially divorcing couples to consult with a family law attorney now for personalized assistance with how and when it is best to proceed.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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