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Alimony tax issue could have ripple effect on existing prenups

On Behalf of | Aug 17, 2018 | Family Law |

Taxes are a subject that is never far out of the minds of Minnesotans. As progressive policy state, taxes tend to be a bit higher here than elsewhere. At the same time, they are lower than many states. One thing that applies to all states, however, is the federal income tax and that is the subject of today’s post.

Many readers surely are aware of the tax law change signed into law at the end of last year. It is perhaps the most notable policy change attributable to the current administration, and one of the most notable provisions in it is a change regarding divorce. Specifically, a tax rule that has been in effect for decades is going away at the end of this year. What some call the divorce subsidy will be no more.

Analysts have been heralding since the early part of this year that one effect of the change is increased pressure on couples currently considering divorce to get the job done by Dec. 31. Those that do will be able to take advantage of old tax rules that allow a payer of spousal support to deduct the payments. Those that don’t will lose that benefit.

Recipients of spousal support gain the most. Under the new system they won’t have to claim the payments as income. Under the sunsetting system, they have to claim payments as income. But since that spouse usually makes less, the tax bite is lower.

Another audience that could be affected by the tax law change, but which is less talked about, is that made up of couples who have prenuptial or postnuptial agreements already in place.

They are probably not contemplating divorce at this point, but the fact that they drafted such agreements indicates they know it could happen. If it does, it likely will happen after the turn of the new year and many experts say it’s possible the existing agreements could become the source of major legal challenges.

That’s because spousal support called for in those tools probably anticipated the old tax regime, rather than the new one. And under the new rule, payers might be less inclined to pay what they originally agreed to.

Working out prenuptial agreements can be a delicate process. Reworking them may be equally challenging. But in the face of tax realities, it seems that reviewing plans with a skilled attorney would be advisable.