Under long-standing tax law, spousal support has been treated as tax deductible for the person paying it and taxable income for the person receiving it. Effective January 1, 2019, that has changed for agreements signed after December 31, 2018. What does that mean for divorcing spouses?

  • More disputes. Previously, a higher-income spouse may have been amenable to paying more spousal support because it was tax deductible. Now that spouse may press for lower support payments. The opposite is also true; the receiving spouse may resist such a reduction since his/her budget requires the higher support. This is likely to lead to more disagreements and prolonged negotiations between the parties.
  • New trade-offs in negotiation. Couples will need to look for other ways to mitigate the tax impact of this change to meet financial obligations. For example, they may use other marital assets to fund support items so that the payor spouse can use some income tax deductible strategies (like increased 401k funding) to shelter post-divorce income.
  • Tax and financial expertise are crucial. Regardless of the federal tax treatment, spousal support does remains tax-deductible for New York income tax purposes. This means the parties will need experts to analyze how various settlement possibilities will affect their tax bill under very different federal and state laws.
  • Modifying a previous support award must be done carefully. The new tax law applies to agreements signed after December 31, 2018. However, if a party had a prior agreement which he/she wants to modify in the future, then the new rules may apply if the modified agreement specifically states that the new tax rules apply.

Divorce is already a contentious issue for most couples. Changing the tax rules will probably prolong disputes in the short term. However, it also highlights an opportunity to use a collaborative divorce process to address these difficulties rather than litigation.

In a litigated divorce, the parties will often have their own financial experts who battle each other. In a collaborative divorce, the parties still have their own lawyers, but they collectively work with a team of advisors including a financial neutral. The financial neutral provides detailed financial planning, organizes documents, explains current and projected income, assets and liabilities and calculates the tax impact of potential solutions. By analyzing and explaining the options available to the parties, spouses can come to an informed and amicable financial settlement.

Collaborative divorce is not right for everyone, but it offers many advantages in cases where there are likely to be financial disputes. Collaborative divorce is an opportunity that should not be missed. Contact me to discuss your divorce options.