Will the new tax law impact divorce settlements?

For California residents, divorce negotiations might be very different in 2019 than in 2018 due to tax code changes.

California is one of the few community property states in the nation but that does not mean that a divorce settlement is always easy to achieve. Many factors may play into what both spouses are willing to agree to. This is due in part to the fact that many decisions made during a divorce have tax implications that must be considered. The agreement to spousal support payments is one of these.

The longstanding approach to alimony and taxes

CNBC reports that for several decades now any money received by a person pursuant to a spousal support award was included on that person's tax return as income and taxed accordingly. On the flip side, the spouse who was ordered to make the alimony payments was able to deduct the money paid from their tax return. This model is still in place but only through December 31, 2018.

The new approach to alimony and taxes

According to MarketWatch, the recently passed tax legislation known as the Tax Cuts and Jobs Act turns the existing treatment of alimony and taxes on its head. No longer will a person paying spousal support be able to deduct such payments from their tax return. Instead, the tax liability for these funds will now transfer to from the payee to the payor.

This change is slated to take effect on January 1, 2019. Any divorce finalized on or after that date will be governed by this law. Additionally, any divorce agreement that was finalized before 2019 but modified after January 1, 2019 will also be subject to this change.

Serious implications for divorce negotiations

The ability to deduct alimony payments has historically offered paying spouses some relief in making these payments and potentially assisted in reaching an agreement to do so. Without such relief, it is understandable that a person may be less willing to agree to pay alimony.

Many states rely on software to assist in calculating spousal support payments. Because this software is based largely on tax laws, it will not be helpful in its current form going forward.

In addition, the Internal Revenue Service indicates that if a couple has a qualified domestic relations order, the paying spouse can tap into 401K funds to make alimony payments. The recipient spouse would be responsible for taxes but could avoid them at the time of receipt by reinvesting them into other retirement funds. It is unclear how this may change under the new law.

Legal assistance during divorce is a must

With changing laws such as the one involving taxes, it is important for Californians to work with an attorney during a divorce. This will allow spouses the ability to have someone explain the ramifications of different decisions to them so they may make appropriate choices.