If you followed our blog series this month so far, you should have a general understanding about the effects the new tax law may have on those of you contemplating getting divorced or looking at a possible modification of the orders regarding spousal maintenance. Hopefully you learned, in actual dollars and cents, the effects this new law will have on your finances.
Now, we want to discuss some possible considerations and strategies that may be employed in negotiating spousal maintenance claims moving forward.
As reflected in the calculations from our prior blog, there are some obvious benefits for the paying spouse to file and complete their divorce or modification this year prior to the January 1, 2019 effective date for the new tax treatment on spousal maintenance. Doing so will save you significant money by providing a significant tax break on income that is going to your ex-spouse anyway. But there may be benefits and leverage in negotiations for the receiving spouse also.
Although it is taxable income to the receiving spouse and therefore may have a cost associated with it, such cost may be minimal or be outweighed by the larger amount or longer duration that you may be able to negotiate for if it is still tax deductible to the paying spouse.
Looking at the examples from the last blog, if Richard is looking at losing over $15,000 a year if his spousal maintenance payments are no longer tax deductible to him he might be more willing to increase either the amount of spousal maintenance to $2,500 a month and/or the duration for a couple of more years if Jane agrees to enter that agreement prior to the end of 2018 – even with such an increase, Richard would still be paying less than if it were paid and treated as taxable income to him under the new tax law.
Once 2019 rolls around, negotiations are likely to become much more antagonistic. Because of the inherent issues in trying to figure what an appropriate award should be in light of the increased tax and financial penalty to the paying spouse and the “tax-free” benefit to the receiving spouse as well as the lack of any significant guidelines from the Court in this arena, spousal maintenance is already and will become an even more “hot button” and difficult issue.
Regardless of which side you are on, paying or receiving, a definite focus will need to be placed on the receiving spouse’s need or eligibility for an award under A.R.S. § 25-319 (A). One possible strategy for trying to reach a resolution on spousal maintenance claims would be a return to the discussion on waivers or offsets against such alimony claims from other assets like the equity in the marital residence or lump sum, non-taxable equalization payments may come back in vogue as potential solutions.
Going through a divorce and understanding all of the possible effects on your future income can be difficult, at best, and may necessitate new strategies and considerations in trying to negotiate an appropriate resolution. Having an experienced attorney to advise and assist you with these issues is essential.
If you would like to work with one of our experienced divorce attorneys, please call OWENS & PERKINS at (480) 630-2464 to schedule your free 30-minute consultation.