Monday, February 12, 2018

Should you file for divorce because of the new tax law?

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In writing this article I am not encouraging people to file for divorce. In my opinion, the decision to divorce or stay married should be based on a desire to spend the rest of your life with your spouse. It should not be based on financial factors. There are many people who are contemplating divorce and others who are contemplating the optimum time to file for divorce. These are the people that should consider this article.

In December 2017 Congress passed a tax reform law. One of the many changes in this law is that the way that alimony is taxed was changed. Under current law, alimony payments are deductions to taxable income for the payor and taxable as income to the recipient. For judgments after December 31, 2018, that order alimony, the alimony will no longer be deductible as taxable income or taxable as income. It will be treated like child support and have no effect on the taxes of the parties. The change in the law will not change the tax consequences of alimony judgments that enter prior to December 31, 2018.

For people who are contemplating divorce in Massachusetts the following questions should be answered before considering if you should file for divorce quickly:

  1. Am I likely to pay or receive alimony?
  2. If I am likely to pay or receive alimony will the alimony award be so significant that I should be concerned with the tax consequences?
  3. How does the December 31, 2018 deadline apply to Massachusetts divorces?
  4. What happens if a current judgment of alimony is modified or changed?

  1. Am I likely to pay or receive alimony?

In Massachusetts, alimony is ordered when there is a need for spousal support. There are a number of factors that a judge looks at but a simplified view is that there is no need if each spouse earns enough money to support themselves. Alimony is not designed as an income equalizer. It is designed to provide support to a spouse who can't support themselves without additional funds. In an ideal situation, the standard is the ability to maintain the lifestyle that the couple enjoyed before divorce. In many divorces, neither party can maintain the same lifestyle because they are now supporting two households instead of one. In this case, there may be a need when there is a significant difference in income between the parties.

When the court considers alimony the court also considers child support as a factor. If child support is being paid, then alimony should not be ordered unless the combined income of both parties exceeds $250,000.00. In other words, if the combined income is under $250,000.00 then alimony is probably not a possibility. Some judges may order alimony despite the payment of child support when the parent with the greater income is the recipient of child support.

  1. If I am likely to pay or receive alimony will the alimony award be so significant that I should be concerned with the tax consequences?

Of course, one can consider that any increase or decrease in taxes is significant. On the other hand, the amount of alimony paid may be such that parties may decide that it is better to save on attorney fees than to fight for alimony. In Massachusetts, there are limits on both the amount of alimony paid and the length of time that alimony is to be paid.

The amount of alimony ordered in Massachusetts is between 30% and 35% of the difference between the income of the recipient and the payor. Income for alimony purposes does not include capital gain income, dividend income, and interest income from assets evenly divided between the parties and the first $250,000.00 in income when child support is ordered. This means that if there is a $10,000.00 difference in income between the parties the court could order alimony in the amount of $3,000.00 to $3,500.00 per year. If there is $100,000.00 difference in income the court could order alimony in the amount of $30,000.00 to $3,500.00. If child support is being paid and there is a combined income of $260,000.00 then only $10,000.00 should be eligible for alimony determination.

The length of time that alimony may be paid in Massachusetts varies from 50% of the length of the marriage in short term marriages (under 5 years) to lifetime alimony for marriages over 20 years. In very short marriages, it may not be worthwhile for the parties to seek alimony.

  1. How does the December 31, 2018 deadline apply to Massachusetts divorces?

The Tax Reform law effects any divorce or separation instrument executed after December 31, 2018. It appears that any separation agreement or judgment executed prior to December 31, 2018 would be under the existing tax laws with alimony deductible if paid and taxable if received. However, Massachusetts divorces have a three month waiting period after the initial divorce decree enters (called decree nisi) and the divorce judgment becomes final (called decree absolute.) It appears that the IRS has not issued regulations explaining how the effective date is to be applied to Massachusetts divorces. In order to be completely certain that any alimony judgment is under the current tax laws then the decree nisi must enter by October 2, 2018. If the parties are divorcing by an uncontested divorce which is called a 1A divorce then the judge must approve the separation agreement by August 31, 2018.

  1. What happens if a current judgment of alimony is modified or changed?

Any current order of alimony that is modified or changed after December 31, 2018 will lose the current tax deductibility and will be controlled by the tax reform law. This means that even if your current agreement calls for payments to be deductible from taxable income, Federal law will control and you will not be able to deduct alimony payments if modified after this date.

Additional considerations

The change in tax law only effects taxes paid to the United States. Taxes paid to the Commonwealth of Massachusetts will still be deductions to taxable income for the payor and taxable as income to the recipient.

A contested divorce in Massachusetts that does not settle takes about two and a half years to litigate and conclude. This means that you can only rush a divorce to preserve the current tax treatment if it is an uncontested divorce or a contested divorce that settles before August 31, 2018. A contested divorce filed in 2018 won't go to trial in time to beat the December 31, 2018 deadline. Litigation is not the only way that parties can reach an agreement on terminating a marriage. Mediation and other forms of alternate dispute resolution can help the parties reach a settlement.

This is a complicated area of law. If you are considering a divorce and think that alimony is a possibility then you should consult an experienced divorce lawyer to discuss the applicability of the Massachusetts alimony law and if the Tax Reform Law may be an issue for you to consider.

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