During a recent breakfast with Steve Andrews, we had an interesting discussion about the forthcoming alimony changes pursuant to a divorce.
Steve is an attorney in Atlanta who practices family law (divorce) and estate litigation. We’ve known each other for a few years and get together every few months to catch up and talk about what we’ve been working on lately.
During this particular discussion, Steve brought up the topic of spousal support (aka alimony) and the changes that are coming as part of the 2017 “Tax Cuts and Jobs Act.” Specifically, for divorces finalized after 12/31/2018, alimony is no longer deductible by the payor, nor is it included as taxable income to the recipient.
This means, for a divorce finalized on January 1st, 2019, or later, the payor will be providing monthly support using after-tax dollars.
Steve went on to point out that without the current tax advantage of paying alimony with pre-tax dollars, some parties may increasingly resort to monthly payments of property division rather than alimony. And while this might seem like a small matter of semantics, it can have far-reaching financial consequences.
For example, let’s say you’re negotiating a divorce settlement, and your soon-to-be ex-spouse proposes paying you monthly support. It’s crucial that you understand the impact of how this monthly support is defined in your divorce agreement.
If you’re receiving monthly support payments that are clearly defined as alimony, this affords you certain protections that you wouldn’t have if the monthly support is considered part of the agreed-upon property division.
If you’re receiving monthly support payments, but they’re considered property division, and your ex-spouse files for bankruptcy, your support payments could be discharged. In other words, they could simply go away with the stroke of a pen during a bankruptcy case. Alimony, on the other hand, is not dischargeable via bankruptcy.
Also, if the monthly support payments you’re receiving are classified as property division and your ex-spouse stops making payments, less of your ex’s net pay can be garnished to compensate you. With alimony, net pay garnishment can be as much as 50%, but with property division, garnishment is usually no more than 25%.
But there are circumstances where property division payments might be preferred over alimony payments.
Unlike alimony, property division payments cannot be modified or terminated by the usual alimony termination provisions, such as death, remarriage of the recipient spouse, or a live-in-lover statute. Property division is a fixed debt, owed in full despite subsequent events.
So what do you do if you’re in the midst of divorce or plan to file for divorce and it’s likely not to be finalized until sometime in 2019 or beyond?
Well, I can’t emphasize enough the importance of hiring a qualified family law attorney to represent you during divorce. Here are some tips on how to hire a qualified family law attorney.
And it is often a prudent decision to have a tax expert along with a divorce financial planner on your “team.” You might also need the help of an experienced therapist to help you deal with the emotional and psychological aspects of the divorce process.
And when it comes to the financial components of your divorce settlement, your professional team members can help educate you on the impact of issues like making or accepting periodic support payments and whether they’re considered property division or alimony.
Another option is to negotiate everything into the division of property but with no ongoing payments. While this can make for a cleaner break from your ex-spouse, many of the women I work with really want to receive a series of ongoing payments as they transition to life on their own.
And ongoing payments can also be important if you want to attempt to keep the marital home and refinance the mortgage into your single name. Or if you want to downsize your living accommodations but will still need to take out a mortgage. Or another type of loan.
Let me be perfectly clear . . . I’m not an attorney, nor am I a CPA. I can’t give tax or legal advice. Period.
However, I’ve been fortunate to get to know many great professionals in the Atlanta community who can be important partners and advocates for you as you’re dealing with something as significant as divorce.
Please get in touch with me and let me know if there’s anything you’d like to discuss, or if you’d like me to introduce you to a qualified family law attorney, tax expert, therapist, or other experienced professional.