You may have certain expectations for your divorce negotiations that include tactics for minimizing the tax consequences of your settlement. However, the Tax Cuts and Jobs Act that went into effect on Jan. 1 has changed the landscape of alimony discussions and may also affect the benefits of claiming your children as exemptions on alternating years and the valuation of businesses.
Here are the details regarding these TCJA divorce repercussions, according to the Association of International Certified Professional Accountants.
There used to be incentives for spouses to settle on a fair alimony payment. The paying spouse received a deduction, and the payee spouse claimed the income as, well, income.
If you were counting on that deduction and the lowering of your own income to keep you out of a higher tax bracket, you will be disappointed to learn that the deduction is gone, and paying will not save you from a higher tax rate. If, on the other hand, you are on the receiving end of the alimony, you get that money tax free. The downside to this is that your spouse now has a good reason to fight to lower the amount you receive.
Perhaps you and your spouse have joint custody, and you planned to bargain for certain assets in return for giving your spouse the right to claim the children as exemptions. Unfortunately, the new tax law suspends personal exemptions until 2026, so this bargaining chip is no longer available to you.
Business valuation increases
Spouses who are business owners may be seeing some benefits from the TCJA changes regarding corporate taxes. It is important to note that one side effect is a significant increase in the value of the company. This rise in valuation will undoubtedly have a drastic influence on property division.
Keep in mind that these changes also affect pre-2019 divorces when spouses seek to modify their agreements after Jan. 1 of this year.