Divorce & the TCJA

One provision of the Tax Cuts and Jobs Act in particular made for some heart flips for wealthier couples contemplating de-coupling. The message was get divorced in 2018 or miss out on a tax deduction. As of right now, all those with finalized divorces prior to the end of this year will be grandfathered into a preferred tax arrangement. Currently a former spouse required to pay alimony gets a tax deduction on the amount paid while the recipient pays income at a reduced rate. Going forward, the alimony payer must include the full amount of the payment in their income tax bill but the recipient has no income tax bill.

Attorneys are anticipating that the higher-earning party will be digging in and insisting on lower alimony payments to their former spouses. This is particularly bad for women who are still much more likely to be the lower earner and receiving the alimony. It also will affect children, who frequently remain under their mother’s primary care over the majority of their childhoods. (Child support payments were not affected by the tax law and remain non-deductible.)

Fancy accounting maneuvers are already being discussed to alleviate the tax pain on the alimony payer. Making payments from retirement accounts seems to be an early front-runner and given how weak Americans already are on retirement savings, this seems to be a bad, desperate idea. The only winner here will be the IRS and maybe divorce lawyers whose billable hours will rise while dealing with these lengthy, more acrimonious divorces.

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