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Family law divorce negotiations face changing tax rules in 2019

The Tax Reform Act of 2017 contains changes for Florida residents who obtain a divorce after the end of 2018. At that time, the federal rule that makes alimony taxable as earned income to the recipient and a deduction to the payer will be eliminated. The new rule for family law practitioners to contend with will simply abolish the deduction to payers and eliminate the income requirement to recipients.

The current rule has served the realm of divorce negotiations successfully for many past decades. It is a bedrock of negotiations and has often served to accelerate the decision to enter into an agreement for both parties. The rule that gives a deduction from income to payer has generally been a welcome benefit that convinced many alimony payers to accept a proposed agreement. By making the recipient treat it as income, it also provided a way for the couple to shift income to the lower-income party and thus reduce the overall tax burden to both parties. 

The overall reduction of the tax benefit often resulted because the lower-income recipient did not have a great tax burden from the increased income because of other deductions and tax credits. It is now unknown among family law practitioners how the new rule will be used during negotiations. However, many experts predict that it will result in demands by the higher-income spouse to pay less alimony.

With that result putting less money in the hands of the lower-income spouse, the tax rules may turn out to be an obstacle to obtaining family law settlements in future years. At least, it appears that attorneys representing the lower-income party will attempt to make up the loss by taking a tougher stance on other aspects of the divorce. This could have the effect of increasing the time and complexity of future divorce settlements both in Florida and the rest of the country.

Source: boothbayregister.com, "2017 Tax Reform and the impact on Alimony decreed after 2018: Divorce is hard enough don't be blind-sided by this one!", Sarah Ruef-Lindquist, May 9, 2018

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