Negotiating divorce settlements in Pennsylvania and other states is heading into uncharted territory due to the newly passed federal tax laws. For 75 years, the most established tax rule in negotiating family law settlements has been that alimony is deductible to the payer and treated as income to the recipient. Starting on Jan. 1, 2019 that is all changing, and there will be no alimony deduction to the paying party nor will the recipient pay taxes on it.
The status of divorce law is chaotic because of the change. It is like losing an established keystone in a negotiating landscape that is innately shaky. Even software programs proudly introduced in recent years to calculate support and alimony amounts will be obsolete and useless starting in 2019. One certainty, according to experts, is that the divorce rate will increase in 2018 so that people can get divorced under the current rules.
A divorce executed and finalized on or before Dec. 31, 2018 will remain under the traditional tax rules. Attorney groups point out that offering tax relief to wealthier spouses has been a boon to negotiating settlements. Attorney groups predict that obtaining settlements will be tougher and more contentious starting in 2019.
Experts insist that the present tax rules help to make divorce more affordable. It is generally very difficult for two families to afford the high cost of living under the same income that supported just one family. The current rules helped to alleviate the pressure and facilitated settlements.
The current family law rules in Pennsylvania and elsewhere allow for the wealthier spouse to transfer income to the less wealthy one, who is nearly always in a lower tax bracket. The uncertainty about the new rules has brought increased difficulty in charting out future divorce settlement strategies. The spouse who in the past has paid alimony will now have less cash available due to losing the deduction and will offer smaller alimony payments. The receiving spouse will not do better because he or she will receive less and end up with a net drop in standard of living despite having to pay no tax.
Source: cnbc.com, "Loss of alimony tax break in GOP bill may add to the financial pain of divorce", Annie Nova, Feb. 4, 2018