Making Sen$e Dec 27, 2018 7:04 AM EST
Editor’s note: This story first appeared on Next Avenue.
Nobody ever said going through divorce is easy. Aside from the normal emotions of a broken relationship and family, there’s the paperwork, the attorneys, the courts and, of course, the money. As if dividing up assets wasn’t difficult enough, new tax changes taking effect in January 2019 could add a significant amount of stress to divorces after this year.
Here’s what you need to know if you think you might divorce in 2019 or beyond:
4 tax changes regarding divorce
1. Alimony paid will no longer be tax-deductible and alimony received will no longer be taxable income.
For decades, alimony — typically paid by men — has been tax deductible for the person paying it and taxable income for the person receiving it (typically women). But that basic tenet of divorce will no longer apply next year and beyond, due to provisions in the big 2017 tax law.
This could make the process of divorcing extra sticky, overly emotional and significantly uglier. The law change stands to be the biggest dividing issue in divorces in 2019 and, by some estimates, will raise $6.9 billion for the government over next 10 years.As a result of the new tax treatment, high-income divorcing spouses will aggressively fight to pay less in alimony.
As a result of the new tax treatment, high-income divorcing spouses will aggressively fight to pay less in alimony, since the government will no longer subsidize these payments via the tax deduction. (This could hurt finances for some women, whose income typically falls sharply after a divorce.) Lower-income spouses will likely fight to get as much alimony as possible, since the tax burden will be removed and the payments will go further.
Calculations by Boston University economics professor Laurence Kotlikoff in the Analyze My Divorce Settlement estimator from his company, Economic Security Planning ($99 per year for individuals), have found that the new tax law will likely result in smaller alimony payments.
Incidentally, legal fees paid to attorneys helping secure alimony will no longer be tax deductible in 2019 or after.
You’ll need to have a signed agreement before December 31, 2018 in order to continue to play by the traditional tax rules for alimony.
2. People who are already divorced will be grandfathered in, but if their agreements are modified in 2019 or beyond, they could be subject to the new rules, too.
If the modification states that it is to be governed by the new rules, then the new rules will apply. If the modification says nothing, however, the old rules will apply.
Consequently, people should be extremely cautious when modifying divorce agreements in 2019 and beyond.
3. Pre- and post-nuptial agreements may be affected by the tax changes, too.
The new rules may nullify many of the items in such agreements, so all pre- and post-nuptial agreements should be reviewed by a financial consultant, an attorney or both.
Don’t get caught flat-footed and re-negotiate terms if necessary.
4. Children won’t be the tax deduction they used to be.
The 2017 tax law eliminated the $4,050 exemption for each dependent, through 2025. The child tax credit (which offsets taxes owed, dollar for dollar), however, has doubled from $1,000 to $2,000.
Remember, too, that the standard deduction has almost doubled because of the 2017 tax law. Single taxpayers in 2019 will see a standard deduction of $12,000; it was $6,350 in 2017.
3 Tips on divorce and taxes for 2019
If you’ll be going through a divorce in the new year, here are some things you will want to think about:
1. Know the good from the bad.
With the new laws, you, your spouse, both attorneys and any financial adviser the two of you will use should be looking at all the angles. Alimony might be the headline here, but it is far from the only asset involved in a divorce.
Know the good assets from the bad assets, tax-wise.Know the good assets from the bad assets, tax-wise.
If you are the higher-income spouse, consider giving an Individual Retirement Account (IRA) to the lower income spouse, if applicable, because that shifts the tax burden to the receiver when that IRA is accessed. If you’re the lower-income spouse, know that you would inherit that burden.
Both parties should carefully consider their total tax equations and find the best overall comprehensive way to benefit financially over the short- and long-term.
2. Slow your roll.
Don’t be among the first guinea pigs to file for divorce in the new economics of divorce next year. As attorneys and financial advisers navigate the new world, they will discover patterns, learn new angles and tricks and be better prepared to position you for financial success in your divorce.
3. Take your lumps.
You might consider taking (or giving) a lump sum divorce payment instead of monthly payouts in order to invest, pay for home repairs, or simply to be able to move on quickly.
Every financial situation is unique, so if receiving one large payment annually enables you to responsibly strengthen your fiscal situation, give it serious thought.
In a divorce, finances can lead to difficult processes and hard feelings. So as the new tax laws complicate the rules for couples in 2019, financial advisers and attorneys will need to help them navigate the new terrain together, looking for the best equations and answers.
No one enters into a marriage expecting it to fail. Still, more than 20 percent of first marriages end in divorce within five years, and 48 percent of marriages dissolve by the 20-year mark, according to 2006-2010 data from the government’s National Survey of Family Growth.1 Separation and divorce are emotionally difficult events, but it is possible to have a healthy breakup.
Cooperation, communication and mediation
The end of a marriage typically unleashes a flood of emotions including anger, grief, anxiety and fear. Sometimes these feelings can rise up when you least expect them, catching you off guard. Such a response is normal, and over time the intensity of these feelings will subside. In the meantime, be kind to yourself. Researchers have found that people who are kind and compassionate to themselves have an easier time managing the day-to-day difficulties of divorce.2
Try not to think of the breakup as a battle. Divorce mediation is often a good alternative to courtroom proceedings. Trying to work things out yourself can be frustrating and self-defeating as the problems that contributed to your divorce are likely to re-emerge during divorce negotiations. Research shows that mediation can be beneficial for emotional satisfaction, spousal relationships and children’s needs.3
Sitting down and speaking with your soon-to-be-ex-spouse may be the last thing you want to do, but cooperation and communication make divorce healthier for everyone involved. Talking things through with a psychologist may help you reach coordinated decisions with a minimum of conflict.
It can be difficult to remember important details when emotions are running high. Pick a time when you’re feeling calm to write down all the points you want to discuss. When you do sit down with your soon-to-be-ex-spouse, use the list as your guide. Having a “script” to work from can take some of the emotion out of face-to-face communication. If in-person discussions are still too difficult, consider handling some of the details over email.
When kids are involved
Divorce can be a traumatic experience for children, but research suggests that most children adjust well within two years following the divorce; on the other hand, children often experience more problems when parents remain in high-conflict marriages instead of splitting up.4 During a divorce, parents can do a lot to ease the child’s transition. Do your best to keep any conflict away from the kids. Ongoing parental conflict increases kids’ risk of psychological and social problems.5
It’s often helpful for divorcing parents to come up with a plan and present it to their children together. And, keep the lines of communication open. Kids benefit from having honest conversations about the changes their family is experiencing.
In many cases, sudden change can be hard on children. If appropriate, give them a few weeks’ notice before moving them to a new home, or before one spouse moves out. It can be helpful to minimize changes as much as possible in the months and years following a divorce.
Kids do better when they maintain close contact with both parents. Research suggests that kids who have a poor relationship with one or both parents may have a harder time dealing with family upheaval. Parent education programs that focus on improving the relationship between parents and their kids have been shown to help children cope better in the months and years following the divorce.6
Taking care of yourself
The changes brought on by separation and divorce can be overwhelming. But now more than ever, it’s important to take care of yourself. Tap into your support network, turning to family and friends for assistance and comfort. Formal support groups can also help you cope with the many emotions of a marriage ending.
To stay positive as you start a new chapter, try getting involved in activities you used to love but haven’t done in a while. Or try new hobbies and activities. Stay physically healthy by eating right and getting exercise.
How psychologists can help
Divorce is a difficult time for the entire family. Divorcing spouses and their children can benefit from speaking to a psychologist to help them deal with their emotions and adjust to the changes. Psychologists can also help you think carefully about what went wrong in your marriage so you can avoid repeating any negative patterns in your next relationship.
To find a professional psychologist in your area, visit APA’s Psychologist Locator.
- Making stepfamilies work
- Breaking up is hard to do: Challenges of same-sex divorce
- That’s mine! Property division in divorce
- Key Statistics from the National Survey of Family Growth
- Sbarra, D. A., Smith, H. L., and Matthias, R. M. (2012). When leaving your ex, love yourself: Observational ratings of self-compassion predict the course of emotional recovery following marital separation. Psychological Science,23(3): 261-269.
- Shaw, L.A. (2010). Divorce mediation outcome research: A meta-analysis. Conflict Resolution Quarterly, 27(4): 447-467.
- Kelly, J.B. (2012). Risk and Protective Factors Associated with Child and Adolescent Adjustment Following Separation and Divorce. In K. Kuehnle and L. Drozd (Eds.), Parenting Plan Evaluations: Applied Research for the Family Court (49-84). New York, Oxford University Press.
- Kelly, J. B. (2005). “Developing beneficial parenting models for children following divorce.” Journal of the American Academy of Matrimonial Lawyers, 19: 237-254.
- Velez, C.E., Wolchick, S.A., Tein, J.Y., and Sandler, I. (2011). “Protecting children from the consequences of divorce: A longitudinal study of the effects of parenting on children’s coping processes.” Child Development, 82 (1):244-257.