Should You Get a Divorce Now or Later?

July 31, 2018

 

As I've written previously, the Tax Cuts and Jobs Act of 2017 (TCJA) that took effect in January has added a new urgency for wealthy Americans contemplating divorce.

 

In this Wealth Matters article in the New York Times, Paul Sullivan writes that several key changes in the law may determine whether it is better to complete or update a divorce agreement by Dec. 31 or wait until the new year.

 

One of the biggest changes affects alimony, which will not be a tax break for Americans whose divorce agreements are completed or updated after this year. The new tax law is also causing parting spouses to look more closely at benefits for their children and the values of privately owned businesses and partnerships.

 

There is a lot of money at stake for wealthy couples. Nearly 600,000 taxpayers claimed alimony deductions totaling more than $10 billion for the 2010 tax year, according to the Internal Revenue Service.

 

For couples who drew up prenuptial agreements, the outcome should they divorce is more uncertain. It is common in prenuptial documents to have a clause saying alimony payments are deductible for one spouse.

 

Other tax-driven divorce issues require a more careful eye.  One is how private businesses should be valued. This has always been an important component of divorce settlements. But the new tax law increases the cash flow of certain pass-through entities — businesses where the taxes on the earnings are paid by the owner, not the company — in a way that raises their value.

 

It is also important to look closely at the tax benefits of different assets.  For instance, couples should weigh receiving a house versus a spouse’s retirement plan. Traditionally, the spouse who has custody of the children wants the house. But the new tax changes, particularly in states where deductions for high state and local taxes have been capped, may make the family home less valuable in the long run than a retirement account with a similar value.

 

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