n 2014, 813,000 couples divorced in the United States. About 18,500 of divorces filed in 2016 were filed in Maricopa County, Arizona. In 2016 in the United States, 361,000 taxpayers claimed alimony deductions last year, but only 178,000 reported receipt of spousal maintenance.
Currently, through December 31, 2018, the 75 year-old tax deduction for alimony payors will remain in effect. That deduction to the payor means the alimony is income to the payee under the following circumstances:
The person paying alimony has more incentive to pay family support obligations as spousal maintenance with the currently-allowed alimony tax deduction. Agreements or decrees settled after December 31, 2018 won’t take advantage of the deduction. It is more important now than ever to finalize divorce and legal separation arrangements before the end of 2018. What a lot of people do not realize is that the average divorce court case can take more than a year to finalize. If people use collaborative law, divorce cases generally take less than a year and almost every collaborative case resolves in a satisfactory settlement.
If you sign a separation or divorce agreement before 2019, the alimony arrangement can preserve money within a family. People who divorce or legally separate out of court typically refer to financial experts to minimize their taxes. In 2018, that out of court divorce and separation option will be available. After 2019, you may be stuck with alimony payments that you cannot deduct from your income.
Spousal maintenance, also called alimony, can have far-reaching effects in divorce or legal separation in community property states like Arizona and California. Other family support obligations like child support are determined based on income. When one spouse’s income is higher as a result of spousal maintenance payments, where the other spouse’s payments are lower, then child support can decrease. Child support is not tax-deductible.
In Arizona, there is already more incentive than ever to divorce out of court. Judges can vary wildly in their awards of spousal maintenance or alimony. For instance, if you present Judge A with a couple where the husband earns considerably less than wife, on a twenty-year marriage with two grown, healthy children, Judge A may award $6,000 in alimony per year to Husband for only four years. Judge B, however, may see the same evidence, the same facts and hear the same testimony. Judge B’s alimony award may be a $30,000 per year award to Husband for 12 years.
Alimony is typically paid in once or twice per month payments, but we’ll calculate spousal maintenance annually. That $30,000 per year award means that Wife’s $30,000 annual payment is deducted under the current tax plan. The deduction will save Wife about $10,000 per year. Husband’s income was lower, so he only paid $4,500 in taxes. Between them, the divorcing spouses saved money from the hands of the government. The payments are reduced because the lower-earning, financially “out” spouse needs to survive.
After 2019, judges will still award spousal maintenance. But judges can’t get creative with your divorce decree. Judges are limited to very specific requirements of the law. Alimony will not be tax deductible after 2019. In my view, there will be new ways to get creative. Options abound, including equalization of community assets, college savings plans contributions, employing your spouse in your business (but they won’t come to work!), and mortgage interest deductions. Financial analysts will kick into high gear to determine new ways that people can save money.
If people use out of court settlement negotiations, there is a greater chance of receiving spousal maintenance from the paying spouse. This is because the spousal support may be in the form of other tax-deductible options.
In divorce court, you won’t have the advantage of financial experts. In court, a judge will order spousal maintenance without considering your tax implications. A divorce court marriage could take you more than twice as long as a divorce that you negotiate out of court. If you file for a divorce in January 2018 and you litigate your divorce in a conventional court case, you may not finish the case before 2019. A litigated divorce may include negotiations, with the feeling that there is a gun to your head. But those negotiations may not be in good faith, or may not include realistic offers.
For the average divorcing or legally separating couple in 2018 or afterward, in 2019, the goal would be to make an agreement that keeps the most money in the hands of your family and children. Spousal maintenance or alimony aren’t the only financial implications of a divorce. If you are continuing to raise children, sell or run a business, sell a home, these aspects of divorce present long-term financial concerns.
To reach an agreement at the end of your divorce, how you start matters. Consider every aspect of your behavior at the outset.
Show the other person that you are armed and prepared, but you are also willing to be reasonable and consider their feelings and concerns. Mutual respect can lead to a mutual settlement. In order to reach a settlement that fully considers all the potential financial advantages and disadvantages of your particular situation, you need to reach a written agreement by December 31, 2018. If you don’t consider the above list, but you start a divorce in a conventional court case in January 2018, your written agreement may leave money on the table.