Arizona couples who decide to divorce may see their financial plans affected by the Tax Cuts and Jobs Act, which passed Congress and was signed into law into December 2017. The financial aspects of divorce may outweigh the practical and emotional consequences of the end of a marriage, and this can often be the case when taxes are involved. One of the most significant changes put in place by the tax reform bill essentially reverses how alimony and spousal support payments are treated in the tax code.
For people who divorce before the end of 2018, the current tax system will remain in place. Under this system, the person who pays alimony can deduct those payments from his or her taxes at the end of the year. For wealthy couples with high-asset divorces and significant annual income, the tax benefit of this deduction can be substantial. At the same time, the recipient of spousal support, usually in a lower tax bracket, pays taxes on the payments with his or her annual tax return. The recipient can direct those payments to a retirement fund. This system provides benefits for both parties that encourage a generous alimony agreement.
For people who divorce in 2019 or later, however, a different structure will apply. The payor will no longer be able to deduct alimony payments from his or her taxes, and the recipient will no longer need to pay taxes on the income. While this may seem a boon to the recipient, it is likely to drive payments downward.
Many couples are looking to speed up the finalization of their divorces in order to avoid these tax changes. A family law attorney may work with a divorcing spouse to protect key assets and develop a plan that can maximize tax savings with a fair settlement on issues including property division and spousal support.