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Three Ways the New Tax Law Changed Divorce Negotiations

Recent tax reform has changed the role taxes play during divorce. As a result, the old rules regarding divorce and taxes are often outdated. Three specific areas of divorce that were impacted include:

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  • Alimony. The new tax law removed the tax benefit that came with alimony. In the past, those who paid alimony could take a tax deduction. The new law removed this deduction. This deduction served as a valuable negotiating tool. As a result, divorce negotiations have slowed. One possible resolution: use a trust. Although it will not result in the same tax savings as was once available, if drafted wisely it can result in less of tax burden then traditional alimony payments.
  • Children. Children can still prove beneficial when it comes to tax savings, but just how much has changed. The new tax law removed the $4,500 exemption for each child but increased the child tax credit from $1,000 to $2,000. It is important to note that the credit is only available for those with an income less than $240,000.
  • Property. Under previous tax law it could prove advantageous for the spouse with less income to retain the family home. The new law put a limitation on state and local tax deductions (SALT) that removed one of the financial benefits tied to home ownership as property taxes may no longer be fully deductible. This is particularly true in high property tax states, like New Jersey.

These are just three of the changes to the tax code that are most likely to impact divorce negotiations. Additional considerations may be required depending on the details of your financial situation.

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