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Should you file for divorce before the new tax code takes full effect next year?
By Rick Navarrete and Christine Schwartz
The new tax code will take full effect on January 1, 2019, and several
of its provisions are anticipated to have a significant effect on
divorce. With just months to go before the tax code replaces previous
laws, potential divorce filers need to consider whether it is best to
wait and plan their divorce to take place after January 1, or to file
quick before the deadline. Which move will be more beneficial depends on
several factors unique to your own circumstances.
The Tax Cuts and Jobs Act
The Trump
administration’s Tax Cuts and Jobs Act will impact several aspects of
tax law, including alimony deductions. Currently, tax laws allow for
Americans to deduct money spent on alimony from their taxes. As of next
year, that deduction will be eliminated. This could mean big changes, as
over 600,000 people currently claim alimony deductions.
Factors Divorcing Couples Should Consider
Before December 31
If you are on the fence about filing for divorce now or later, here
are some factors to consider:
Alimony: The alimony deduction has existed since 1942. While
developed to assist joint taxpayers in the transition to single payers,
the deduction was said to have led to the underreporting or
over-reporting of alimony payments in recent years. Now, the alimony
payer will be taxed on all alimony paid, while the recipient will not
need to pay taxes. The alimony deduction has long been used in alimony
negotiations, often proving important for the lesser earning spouse. If
alimony will be at stake in your divorce, it may be wise to consider
filing now to preserve the deduction.
Prenuptial agreements: Given how long the alimony deduction
has existed, it has become standard practice for many attorneys to
insert a clause into the prenuptial agreement that stated alimony
deductions would be made for the paying spouse. Now, it is unclear
whether such a clause would be upheld. Couples with a prenup agreement
that contains such a clause will want to speak to their attorney about
potentially changing the document.
Division of the family business: If one or more businesses
are at stake in your divorce, you will want to pay close attention to
the new tax law. Traditionally, private businesses were valued using
their cash flow and earnings. Per the new tax law, businesses could
experience an increase in cash flow if they are a pass-through entity.
This could increase the business’ valuation, which may not be accurate.
A business valuation expert may be needed to analyze and fairly value
the business, which will cost money.
With so many questions surrounding the new tax law, it is best for any
potentially divorcing couples to consult with a family law attorney now
for personalized assistance with how and when it is best to
proceed.TBJ
This article, which was
originally published on Navarrete & Schwartz’s Family and Criminal
Law Blog, has been edited and reprinted with permission.
RICK NAVARRETE
is a co-founder of
Navarrete & Schwartz in Midland, where he handles family litigation
and criminal defense matters. He has practiced for 18 years in West
Texas. Navarrete is a member of the State Bar of Texas Family Law
Section and the Administration of Rules of Evidence Committee.
CHRISTINE SCHWARTZ
is a co-founder of Navarrete & Schwartz in Midland, where she
focuses on divorce, child custody, and family law litigation. She is a
graduate of Vanderbilt University and is a member of the Texas Bar
College. For more information, go to nstexaslaw.com.
