By Richard A. Mann, Mann Law PC
If you are the spouse in a pending divorce in Indiana, you should speak with your CPA and your attorney about the significant impact the new federal tax law has on you and your ability to negotiate a settlement that allows you to make much of what you pay to your ex-spouse deductible for tax purposes.
The law allowing for deduction of alimony paid and inclusion of income for alimony received was repealed. As part of that repeal, the law states:
2017 Acts. Repeal applicable to any divorce or separation instrument (as defined in 26 U.S.C.A. § 71(b)(2) before Dec. 22, 2017) executed after December 31, 2018, and any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by section 11015 of Pub.L. 115-97 apply to such modification, see Pub.L. 115-97, § 11051(c), set out as a note under 26 U.S.C.A. § 61.
26 U.S.C.A. § 682 (West) [emphasis added].
Most read this to mean that not only must the parties sign the agreement by December 31, 2018, but also the judge must approve it by that date as well. I have been handling divorces and mediations for nearly 40 years and I can assure you that there is not much chance you will be able to have a judge sign your divorce on December 31, 2018. If you review my prior post on the deadline for finalizing a divorce this year in Indiana, you will realize that realistically the last day to get a divorced signed is December 21. If you look at the calendar, most courts will be closed December 24, 25 and 31. If you are in an e-filing county, many judges do not see that you have filed until a day or two after it has been filed.
While this may have a greater impact for wealthier parties, I have mediated cases where the combined income of the parties is under $100,000 a year but allowing payments to be made over a few years and making it deductible has made it possible to settle. Even if you are not the spouse with the most money, this may be an attractive method for your spouse to pay you more since the true costs are reduced by their marginal tax rate. The highest rate currently is 37%. This means the monied spouse may be able to pay more as their true cost is less due to the tax break.
For example, if they are in the 32% tax bracket, then if they pay $100,000, their costs are really $68,000 as they get a tax reduction for money they pay. The payments could be made over more taxable years. For example, they could pay the $100,000 in two years of $50,000 in 2018 and the same in 2019. The receiving party must pay taxes on the amount they receive. For example, the $100,000/2 = $50,000 - $12,000 standard deduction (if they are single, $18,000 if head of household). The result is they only are taxed upon $38,000 ($32,000 if head of household) each year (assuming no other deductions), thereby, paying taxes of $4,370, if single, ($3,568 if head of household). Therefore, the paying spouse is in effect paying $68,000 and the receiving spouse is actually receiving $91,260 if single, ($96,432 if head of household) due to the tax benefits. Depending upon the sophistication of the professional advisors involved, either side may be able to negotiate a different arrangement. The exact terminology of the agreement also affects the tax consequences so you should not attempt to draft your own agreement. It is not as simple as it sounds.
Of course, your situation can be different, and you should consult a CPA.
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