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Are you ready for new tax law's effects on prenups?

There has been a great deal of news coverage in recent months on one particular provision of the tax law changes passed by Congress and signed into law at the end of last year. It's the one on how spousal support payments and income will be taxed by the IRS starting next year.

The change

In case you have not heard, payors of spousal support (a.k.a. alimony) under divorce or separation agreements executed after Dec. 31, 2018, cannot claim a deduction on his or her income taxes. That ends a practice that has been in place for the past 70 years. Recipients of support still have to report the money as income and pay taxes on it.

For those in Ohio and West Virginia who might be considering whether to end marriages, the implications are obvious. Anyone seeking to take advantage of the current model of deductibility will need to come to terms by the end-of-year deadline.

The potential reach

But, as some observers note, the implications of the change go further. For example, what about pre- or postnuptial agreements that exist but which are based on the old tax treatment formula?

These legal instruments establish the provisions of settlements, including the payment of spousal support in the event of divorce or separation in the future. Such agreements entered into after the turn of the new year will certainly require greater care in the drafting to take the tax consequences into account.

But perhaps of equal concern is that those with pre- and postnuptial agreements in place now face the need to revisit the support terms to reflect the new tax reality. And while agreement might have been relatively easy to reach in the initial endeavor, the loss of deductibility could make finding common ground more difficult in the rewrite.

And considering that the federal law change could trigger changes in the near future in how each state approaches the issue of spousal support, a cycle of ongoing review and revision of pre- and postnuptial agreements could be necessary.

Legal landscapes can and do change. Individuals must adapt. To ensure optimal protection of their rights, they should consult experienced counsel dedicated to understanding their objectives.

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