For people in Illinois with significant assets, finalizing their divorces could be more expensive after 2018 comes to an end. The Tax Cuts and Jobs Act, passed in late 2017, included significant changes to the tax treatment of alimony payments that will go into effect with the new year in 2019. For decades, spousal support payments have been tax deductible for the payer and taxable for the recipient. This arrangement results in an overall tax savings because taxes are paid in the lower tax bracket of the recipient.
Divorce is always expensive, especially when a significant amount of assets are at stake. When one partner is a much higher earner, spousal support is common for at least some period after the split. This is especially true for couples in which one partner was a stay-at-home parent. The tax deduction available for the payer provided a strong incentive for wealthy spouses to reach an agreement with generous spousal support.
With the dawn of 2019, this arrangement will change. Alimony payments will no longer be tax-deductible for the payer, and the receiver will get the funds tax-free. While this may appear to be a positive change for recipients, it eliminates a major incentive to agree to significant spousal support. As a result, many couples are hurrying to finalize their divorces before 2018 draws to a close. All divorces completed before the end year’s end will retain the existing tax structure. Others are looking for creative options to produce tax benefits in 2019.
The financial consequences of divorce may be more significant than the practical and emotional effects. A family law attorney can work with a divorcing spouse to analyze the financial aspects of the end of the marriage and to achieve a fair settlement on a range of divorce matters, including spousal support and property division.