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Tax law changes may affect divorce settlements

Wed 22 Aug, 2018 / by / Divorce

People in Illinois who are considering divorce may want to consider how 2017’s Tax Cuts and Jobs Act could affect the separation process. In 2015, over 600,000 taxpayers deducted alimony payments from their annual tax returns. Due to changes in the law, however, people who finalize their divorces after 2018 will no longer be allowed to deduct alimony payments from their taxes. In addition, the recipient will no longer pay taxes on the income. These changes will reverse nearly 80 years of legal practice on taxation and spousal support.

In 1942, the Revenue Act established that alimony payments would be tax-deductible to the payor and taxable to the recipient. In many ways, this arrangement was mutually beneficial because it enabled recipients to receive a larger amount of spousal support each month and also provided a tax benefit to the paying spouses. This tax system helped to conclude many divorce negotiations successfully. Lots of wealthy people have been rushing to complete high-asset divorces in 2018 in order to avoid the changed tax implications with alimony.

Some experts have advised that it may be possible for couples to create post-nuptial agreements that adhere to the pre-2019 tax arrangements, depending on guidance that the IRS has not yet issued. Alimony is not the only matter subject to changes after tax reform. Businesses will be valued differently as cash flow increases for certain types of firms. This means that the value of the businesses can be higher, and both parties may present competing estimates of their worth.

Wealthy couples who are considering divorce may want to act quickly considering the changes taking place in tax law. A family law attorney can help a divorcing spouse understand the proper valuation of assets, protect key investments and achieve a fair settlement on issues like property division and spousal support.