Arizona couples who are planning to divorce may have some extra incentive provided by federal tax law to act as quickly as possible to finalize their splits before the end of 2018. As part of a package of tax reforms, changes are coming to the handling of key issues. Many divorcing spouses may wish to avoid these changes and the potential they could represent for an additional tax burden.
Because these changes will only affect divorces that are finalized on or after Jan. 1, 2019, completing a divorce in 2018 means that these changes won’t have an effect on finances. The most well-known of the tax law changes that will happen after 2018 is the treatment of alimony. Under the current system, a former spouse who pays alimony can deduct those payments from his or her taxes. For people in high income and tax brackets, the effect can be significant, cutting up to 50 percent from a paying party’s tax bill. At the same time, the recipient pays taxes on the alimony. As taxable income, these funds can also be put into an IRA for retirement.
Under the new plan, the payer will no longer receive a tax deduction; instead, the alimony will be taxed alongside all of his or her income. The recipient will no longer need to pay taxes on it. However, rather than being a boon, the significant change in financial impact could drive down the overall payment amount.
For couples who want to complete their divorces under the current system, finalizing before Dec. 31, 2018 will lock in the existing tax treatment. A family law attorney can represent a divorcing spouse in negotiations and help to achieve a fair settlement on alimony and other applicable issues.