New Tax Law and the Benefits of Waiting to Divorce

Although there have been considerable media attention; on how the Tax Cuts and Jobs Act will eliminate the tax deduction for alimony payments starting in 2019. Relax, all is not lost for couples going through divorce in New York.

Two other areas of the law may benefit parties who are unable to reach a settlement or finalize their divorces; before December 31, 2018. The Act includes advantages related to both business valuation and retirement accounts; involving divorce cases that are pending after January 1.

In a divorce; ownership of a business is one of the most highly contested asset division issues. The new tax law changes business valuation for certain types of “pass-through” entities. I.e., companies where the individual owner pay taxes on the earnings; not the entity. The end result for many businesses; is the value of the organization is increased; which in turn increases cash flow and reduces taxes. A business previously assessed at a value of $2 million could go up to $3 million. After application of the new tax regulations, the value of pass-through entities in divorce cases may have significant effects on multiple aspects. Such as, the division of property, spousal maintenance, and child support.

Richard J. Bombardo, an experienced divorce attorney at the Bombardo Law Office, PC in Syracuse, NY, discussed business valuations and the implications of the new law.

“Basically, the owner spouse will have more money contributing to the marital estate. Because the ownership interest usually stays with that individual, business valuation could lead to a seemingly lopsided award to the other spouse when it comes to alimony and asset distribution.”

The second aspect of the new tax law affecting divorce cases relates to alimony payments for divorces completed in 2018 and going forward in 2019. As mentioned, it is necessary to complete the divorce process by December 31, 2018, in order to receive the tax deduction for spousal support. Qualifying couples must pay in cash to get the deduction. Under the Tax Cuts and Jobs Act, divorce agreements after January 1, 2019 allow the payor to transfer alimony funds via retirement accounts – which offers tax benefits that serve to offset the effect of the new rule prohibiting the deduction.

Attorney Bombardo commented on the advantages to couples divorcing in 2019 or after.

“By making spousal support payments through a retirement account; a party is paying out funds that he or she would have to pay tax on when making a withdrawal. Therefore, divorcing couples shouldn’t be in a rush to divorce by the year’s end: There are still tax advantages available.”

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