Change in US Tax Rules for Alimony
A big change in US tax rules for alimony is coming up in December 2018.
Do you live in the UK and your ex in the US? Or do you live in the US and your ex in the UK?
This change might apply to you and you may need to take urgent action.
The Tax Cuts and Jobs Act 2017 applies after 31 December 2018. Currently, payment of alimony (as maintenance is known in the US) is tax deductible. And those who receive alimony (the lower earner, so generally the wife) pay tax on it.
The change will mean husbands (generally the higher earner) will get no tax advantage and wives will no longer pay tax.
Two Ways of Looking at Change in US Tax Rules for Alimony
International families are rushing to finalise their financial arrangements to preserve the tax position. But there are two ways of looking at it.
Some say it’s a bad thing. Husbands will lose the tax advantage and may want to pay less alimony. And as wives won’t have to pay tax why should husbands pay them so much anyway? If you look at it this way you can understand why some international couples are panicking.
The UK went through similar tax changes in 1989. Lawyers were initially nervous. Would husbands be less willing to pay? Would wives miss out?
But in the long run the change in UK tax law didn’t make too much difference. Maintenance is calculated in the UK on the basis of need. How much does the wife require to support herself and the children? And what is the shortfall between her requirement and her income? This figure generally indicates the sort of maintenance that is required. See my recent blog Maintenance and Clean Break on Divorce.
Since 1989 there hasn’t been the head scratching and the complicated calculations – if he pays this much, how much tax relief will he get? So shouldn’t he pay more and pass over some of the benefit? And what about the wife, will it push her into a tax paying bracket? How much tax exactly will she have to pay? None of this applies anymore. In the UK it’s now a simple case of “What You See Is What You Get“.
Change in US Tax Rules for Alimony – Long Term & Short Term
Short term, couples will want to take advantage of the existing tax system. But hopefully the impending change won’t tip wavering couples into divorce.
Long term, it’s possible the change won’t make a fundamental difference. And it might save on professional fees as it will be simpler to work out what is actually paid and received – because they will be one and the same.
Change in US Tax Rules for Alimony and International Tax Rules
If one of you is US or UK based, and the other in a country where tax remains relevant, such as Belgium, Ireland, Italy, Netherlands or Portugal, make sure you take advice from an expert international family lawyer.
Prenuptial Agreements
If you are in an international family and you have an existing prenuptial agreement you should seek advice on the impact of the change in US tax rules for alimony.
Don’t Delay!
Anyone wanting to take advantage of the existing system should make sure they take advice now. There may still be time to secure a maintenance or alimony order – whether by consent or in Court – prior to 31 December 2018. And please note that the detail of the changes coming up in the US tax rules are complex and far reaching, and go well beyond the scope of this article. So please don’t delay taking expert advice.
Contact Joanne Houston on 01962 217640 for free advice on the forthcoming change in US tax rules for alimony. In this 20 minute session we will review your situation and how you can achieve your objectives.
JUST FAMILY LAW are specialist divorce and family law solicitors offering personalised legal solutions. We offer collaborative law which is especially relevant in providing solutions tailored to your family’s needs. This includes same sex couples and their families. Visit our website just-family-law.com The topics covered in this blog post are complex and are provided for general guidance only. Therefore if any of the circumstances mentioned in this blog have application to you, seek expert legal advice.
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