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How tax change in alimony might affect negotiations

Because it marks a once-in-75-year change, this blog has written previously on the federal government’s recent decision to adjust how alimony is treated for federal income tax purposes. To summarize our previous posts, any Massachusetts alimony order finalized on or after January 1 will not be a tax-deductible expense for the person order to pay alimony, nor will it be taxable income to the recipient. In other words, there will be no tax consequences either way with respect to alimony payments.

While we mentioned that this could affect how divorce and other family negotiations proceed in the future, it may be helpful to understand exactly how this change in legal landscape could make the divorce process more contentious, at least when it comes to property division.

For example, it is frequently the case in which one person makes a lot more income than his or her spouse. In a divorce, this could mean that the higher earner knows he or she will either have to cough up more than half the marital estate or agree to some sort of alimony payment, if not both.

The nice thing about making a hefty alimony payment is that it, depending on a person’s situation, it could place the person in a lower tax bracket, meaning that the alimony payment not only reduces the tax basis, it also to some extent reduces how many cents on the dollar the person has to pay.

The one receiving alimony, on the other hand, gets a guaranteed and quick stream of cash, usually without as significant of tax consequences. The end result was a win-win, an option which after a few days will no longer exist.

What this means is that a high-earner may have more incentive to fight to keep as much wealth as possible, making divorces more expense and more difficult to negotiate. Getting around this new obstacle may require the skills of an experienced and creative family law attorney.