Proposed Tax Changes – Impact on Divorcing Couples

Major changes to the U.S. tax code have resurfaced as part of the nightly news during most modern election cycles. However, the new administration appears to be intent on pushing through some form of change, parts or all of which may soon come to pass. For couples who may be considering divorce, some of those changes could have far-reaching effects on one or both spouses.

The IRS has a post on their blog ominously titled “The Tax Consequences of Divorce.” Tax law is challenging enough before throwing divorce into the mix. A fair settlement is important, but divorcing couples need to carefully consider the effects of their actions on the long and short-term financial stability of both parents, and on their children.

The New York Times has a set of charts that help explain the proposed tax plan. Some of the potential changes to the current tax code will affect exemptions available to one or both spouses. The possible reduction in the number of tax brackets may also change the income level with which either partner identifies, creating financial strain where none may have previously existed.

One of the most important issues currently under consideration is tax implications of alimony. Under current tax law, alimony is deductible by the spouse who pays out the alimony payments and included as income to the recipient. Under the proposed changes, the payments would no longer be deductible. If the payer is also reclassified under a higher tax bracket their financial impact may be much more dramatic than expected.

Other tax implications, such as dependency exemptions and child support, may not be under consideration today, but that does not mean they will be completely ignored. Although child support is currently not taxable to the spouse receiving the payments, this should be carefully watched for any changes.

With or without tax code changes, there are many reasons to consult a West Michigan accountant who is familiar with divorce implications on taxes. It is also important to discuss the effects of current tax obligations and potential adjustments with a qualified Grand Rapids divorce attorney, such as Johnsen Wikander, before filing any paperwork.

Please contact Johnsen Wikander today and let us help guide you through the many challenges of divorce.