How Will Alimony Change in 2019?
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For high net worth individuals, getting divorced may become a lot more expensive after this year. Not only must the parties’ property be distributed, but a court may also order that one spouse pay the other alimony. Alimony is the periodic payment of spousal support from a high-earning spouse to his or her financially dependent spouse. As the law currently stands, alimony is deductible to the paying spouse and taxable to the spouse receiving it. The deduction allows the paying spouse to be evaluated in a lower bracket for federal income tax purposes, thereby saving them considerable sums of money each year. This creates an incentive for high-earning spouses to be more agreeable to alimony, ultimately decreasing the time and money the parties spend fighting in court.
Given the financial benefits to both parties, alimony has historically been used as a bargaining chip in divorce proceedings. Come January 1, 2019 however, the tax ramifications of alimony will undergo a major shift. Under a new tax bill, alimony will no longer be deductible to the paying spouse or taxable to the spouse receiving it. The tax consequences for the paying spouse will be significant. It is estimated that over $6 billion dollars will go into the government’s pocket, rather than that of spouses paying alimony. For individuals of particularly high net worth, this will make alimony much more expensive than it is under the current law. Beyond the tax consequences, the new law may also result in other, more general consequences such as increased litigation. Because alimony will no longer be deductible to the paying spouse, the incentive to agree to alimony (in higher amounts, or at all) is lost. Thus, high-earning spouses will likely try to fight alimony more often, thereby resulting in increased litigation.
The new tax law will apply to all divorces finalized after December 31, 2018, while those finalized prior to this date will continue to be governed by the tax law in effect right now. For many people, it would be in their best interest to finalize their divorce quickly so that any order for alimony will be deductible to the paying spouse. However, as the end of the year gets closer and closer, there are little options left for those who have not yet commenced divorce proceedings. Parties cannot simply get divorced over-night. In Pennsylvania for example, where one party has filed for divorce unilaterally, the court will impose a waiting period of one year before granting the divorce decree. Even if the divorce is mutual, the court will not issue a divorce decree until 30 days has passed. So, for parties seeking a mutual divorce in Pennsylvania, there is a small window of time left in which the divorce can be finalized prior to the new law taking effect. However, if the divorce is unilateral and the proceedings were initiated in the last few months (or not at all), the new tax bill will govern alimony. (Blog by: Kim Seskin)