January has always been known as “divorce month.” But the issues have changed a little due to the Trump Tax Plan (Tax Cuts and Jobs Act) and that’s created new challenges.
One change is the way that alimony (spouse support) is taxed and deducted. In the past, the higher-earning spouse paid the lower-earning spouse an amount on a regular basis for an agreed-upon length of time and was able to take a deduction. It was taxable to the lower-earning spouse.
The new law impacts divorces that are settled after 12/31/18. The payments are no longer deductible for the paying spouse and they’re not considered income for the recipient.
In other words, alimony lost its tax advantage. Since the higher-earning spouse has a higher tax bracket, the government gets more money.
The other issue has to do with SALT limitation. The SALT limitation, effective 1/1/2018, restricts the total of local and state tax deductions to just $10,000. This includes real estate tax that has been paid. In the past, the lower-earning spouse usually kept the house. There was a tax advantage because the real estate taxes were always deductible.
Now, they may not be. The bigger house, even with a big equity position, is just not the tax advantage it once was.
What does that mean for divorce negotiations? The spouse who might normally pay alimony won’t have the tax advantages to do so. The spouse who normally would receive the high equity home as property settlement won’t have the tax advantages previously available.
That means the standard answers have changed. In other words, the Trump Tax Plan has changed the tax strategies we’ve always used in the past for a lot of things, including divorce.