Tax laws can have significant impacts on how a divorce settlement is negotiated, especially for couples in Virginia with significant assets. Due to tax law changes that are scheduled to go into effect on New Year’s Day in 2019, many couples are accelerating their plans to divorce in order to finalize their agreements before 2018 is over.
One of the most significant changes to tax laws for couples deciding to divorce is the way that alimony or spousal support will be treated under federal income tax rules. Currently and in the past, spousal support was tax-deductible for the paying spouse. For people in high tax brackets, this deduction often makes a major difference in their annual tax bill, enabling them to pay a higher amount in spousal support while reaping the benefits on their tax returns. In the current setup, the recipient of alimony payments pays taxes on that income. In general, these taxes were paid in a lower bracket, and because this income is taxable, it could be invested in an IRA.
As of January 1, 2019, the tax treatment of alimony will change dramatically. The income used to pay spousal support will no longer be tax-deductible for the paying spouse. In addition, the recipient of alimony will no longer be required to pay taxes on the income. While this may seem like a good deal for the receiving spouse, it is likely to lower the amount of spousal support overall. However, it will only apply to couples who finalize their divorces in 2019 or after; divorces finalized before that time will continue to use the current rules.
When couples have significant income and assets to divide in a divorce, negotiations can be complex and overwhelming. A family law attorney can work with divorcing individuals to represent their interests and achieve a fair settlement to finalize their divorces as soon as possible.