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Tax changes may affect significant impact on divorce settlements

There was much public debate over the proposed changes when Congress overhauled the tax laws last year. One of the biggest changes was the effect the new laws would have on divorce and the subject of alimony payments. Colorado residents who are preparing for a divorce are advised to take these tax changes into consideration since they may affect a settlement agreement.

Before the tax code was revised, those who were under court order to make alimony payments were permitted to deduct those monies from their income before taxes. Furthermore, spouses who received these payments were required to report them as taxable income. However, as part of the Tax Cuts and Jobs Act that took effect in January of this year, these payments are no longer tax deductible for the paying spouse. The recipient is also no longer required to count alimony as taxable income.

Though it is believed that these changes were meant to help boost the incomes of a lower-earning spouse by eliminating the tax-reporting requirement, it may have the opposite effect since the paying party can no longer benefit from the tax deduction. Instead, higher-income spouses may resist the idea of making payments at all or will try to negotiate a lower amount than was anticipated. Financial professionals used to use the tax deduction as an incentive to get a spouse to agree to these types of support payments.

Those who are filing for divorce are encouraged to consider how these changes may impact their settlement negotiations. If possible, the two parties are encouraged to work out an agreement that will suit both sides. If not, the spouse requesting support payments may need to present a strong case to the court in order to overcome objections based on the tax laws. Colorado residents who are concerned about how to obtain a fair settlement agreement may benefit from the guidance that an experienced attorney can provide throughout the proceedings.

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