Married couples must face the impact of taxes even after they end their marriage. The new federal tax law has made divorce settlement negotiations even more difficult and changed some of its tax consequences. There are some ways to deal with these changes, however.
A major change was eliminating the federal tax deductibility of spousal support payments. Recipient spouses now do not have to claim it as income. This eliminated a tax deduction that often encouraged settlements because of the financial advantages.
One way to deal with this change, at least for more affluent couples, is to create a grantor trust for the recipient spouse that will pay out income, but without the tax burden of spousal support. It should be funded with assets that will create income after the divorce is final. The recipient spouse will need to pay taxes, but the trust, unlike alimony, can continue to pay income to that spouse's heirs after the spouse dies. However, some accountants argue that the IRS may claim that trust payments are actually spousal support.
The new tax law also makes keeping the family home more costly for many families. Taxpayers with income over a certain level lost the federal tax deduction for payment of property taxes. For these reasons, along with the costs of upkeep, spouses may consider selling this asset.
Children have also become a smaller deduction. Their $4,050 per child exemption was eliminated, but the child tax credit was raised from $1,000 to $2,000. This credit begins to phase out at $200,000 of individual income and then ends at $240,000. These credits can be used in settlement negotiations. Credits may be given to the lower-income spouse in return for a concession, such as child visitation time. A spouse may also make a concession for eligibility for college student aid.
Finally, preparing a practice tax return can help factor in all the financial and tax consequences. It can encourage the exchange of information and calculate the outcome of certain decisions and settlement offers.