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Changes to tax law could complicate divorce in Virginia

Tax season is here, and those who are divorced and have not yet filed their taxes may find it more difficult in years to come. This is due to recently passed legislation that affects how spousal maintenance is taxed.

For the past 70 years, the party paying spousal maintenance was allowed to deduct these payments from their annual income taxes, while the party receiving spousal maintenance would have to report the payments as income and have them taxed at a rate of 15 percent. However, under the recently passed federal Tax Cuts and Jobs Act, beginning in 2019 the party paying spousal maintenance will no longer be able to deduct these payments, and in fact would be taxed on them at the federal level. Moreover, the party receiving spousal maintenance would no longer have to pay taxes on these payments. Divorces finalized prior to 2019 will be grandfathered in under the previous tax laws, but this new law would be applicable to any divorce finalized after December 31, 2018.

What does this mean for spouses contemplating divorce or currently going through the divorce process? Well, the parties who would be paying spousal maintenance would likely want to finalize the divorce in 2018, so they can keep deducting their spousal maintenance payments from their taxes. However, parties who would be receiving spousal maintenance may want to put off finalizing the divorce until 2019, when they would no longer have to pay taxes on the spousal maintenance payments they receive. This could make negotiating a divorce settlement that is agreeable to both parties more difficult.

This new law may even affect happily married couples who executed a premarital agreement prior to walking down the aisle. This is because many of these agreements contain provisions regarding spousal maintenance that are based on the previous federal spousal maintenance laws. Couples with premarital agreements may want to revisit these agreements, so that they are fair and appropriate in light of the new tax law, should the couple eventually divorce.

Tax law and divorce law can be two very complicated issues, especially when they intertwine as they do with regards to spousal maintenance. It is important that couples going through a divorce understand how the new tax laws will affect them, so they can make informed decisions.

Source: USA Today, “Divorce under new tax law could complicate calling it quits,” Aimee Picchi, March 12, 2018

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