The new economics of divorce in the new year
Divorce is typically a decision not to be rushed. Between emotions, family, property, children and finances, there are countless factors to be considered. But a change in the tax code is bringing major changes to divorces starting on Jan. 1, causing many to rush to beat the calendar.
Those in the process of divorce, or in a troubled marriage, need to familiarize themselves with the new laws. Those already divorced are grandfathered in under new laws, but if modified agreements are necessary in 2019 or beyond, those taxpayers will be subject to the new rules.
Let's review four things to know for 2019:
1. Alimony will no longer be deductible or taxable. This is the bold print headline here, far outweighing any other factor. A higher income filer has always been able to write-off alimony payments, thereby deflecting the financial loss through tax filings. On the flip side, the receiver of alimony was required to report alimony as taxable income.
2. Existing divorce agreements are grandfathered in unless they are modified in 2019 or beyond. Alimony will continue to be deductible (and taxable) in already-established divorces. But taxpayers who modify those agreements (commonly made to reflect changes in income) will be subject to the new rules.
3. Pre- and postnuptial agreements may be affected. The new rules may nullify many of the items in such agreements, so all deals should be reviewed by a financial consultant and/or an attorney. Don't get caught flat-footed and renegotiate if necessary.
4. Children are not the tax deduction they used to be. The new tax code, through the year 2025, eliminates the $4,050 exemption for each dependent. The child tax credit, which offsets the taxes owed, dollar for dollar, however, is doubling from $1,000 to $2,000. Another change that is that the standard deduction almost doubles in 2019 filings and beyond. Single taxpayers will see standard deductions move from $6,350 to $12,000.
One other smaller note. Legal fees paid to attorneys who are associated with securing alimony are no longer deductible.
These significant changes are sure to cause confusion and maybe even mayhem in early 2019. Here are some likely scenarios we will see among couples, their financial advisers and attorneys:
• Intense Negotiations: The spouse with the higher-income stands to lose money and will fiercely negotiate for lower alimony overall. The spouse with the lower income can be expected to fight as aggressively for a higher payment.
• Lump-sum Payments Will Increase: With few or no tax implications for alimony payments, payors will push for lump-sum or less-than-monthly payments. These might be welcomed by the lower-income tax payer who might want to invest the money.
• Confusion: These are significant changes to tax law and there is no standard or template to follow. Next year will be a confusing period to establish a new normal.
• Slowing of Divorce Filings: Couples may feel like guinea pigs in this "new normal" period of 2019, so they may delay filing or stretch out negotiations until there is some clarity. Many couples might explore informal financial agreements to test the waters before formally signing an agreement.
Divorce is a significant part of adult life for a large fraction of Americans. Like any issue, finances can muddy the waters and lead to difficult processes and hard feelings. The new tax laws will complicate American divorce in 2019 as couples, their financial advisers and attorneys navigate the new terrain together, looking for the best equations and answers.
• Dean Hedeker is owner and principal of Hedeker Wealth, hedekerwealth.com, in Lincolnshire. He has more than 30 years of experience in estate and financial planning and wealth management. He is also an attorney at law and Certified Public Accountant, and he can be reached at email@example.com.