New tax implications to consider in divorce

When Congress passed the Tax Cuts and Jobs Act of 2017, there was a lot of hubbub about parts of the law that would affect divorces. Most significantly, the new tax law made it so that alimony and maintenance would no longer be tax-deductible for the paying spouse or taxable to the person receiving the payment. This made settling pending divorce cases more complicated.

Another part of the law didn’t generate as much attention but may be just as important for divorcing couples to know about. The law got rid of a part of the federal tax code that relates to “grantor trusts.” These are trusts in which the person creating the trust (the “grantor”) is taxed on the income that the trust produces, even if that income is going to someone else (the “beneficiary”).

Before the new tax law, the tax code said that after a divorce, income paid to an ex-spouse from a grantor trust would be taxed directly to the ex-spouse instead of the grantor. Now, even following the divorce, the grantor will have to pay the tax on trust income (even if their ex is the one receiving the income). This is a game-changer that any divorcing spouse needs to consider, especially the spouse who would be the grantor.

Another thing to be aware of is that prenuptial and postnuptial agreements (a contract between a married couple determining each other’s rights in case of divorce) are not grandfathered under the act. That means any alimony or maintenance dictated by the prenup or postnup will be taxed according to the new laws, regardless of the specifics of the contract.

There may be even more consequences created by the new tax law in your specific situation. A local divorce attorney can go over them in detail with you.