The Tax Cuts and Job Act: How Tax Reform Affects Your Alimony

By Jim Warren

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Much has been made in the press about the latest round of tax reform championed by President Trump and Congressional Republicans. The most sweeping tax legislation in a generation, the Tax Cuts and Jobs Act (TCJA) can even affect your divorce, especially with regard to alimony.

Until the TCJA, payors of alimony were allowed to take tax deductions on their alimony payments, easing their tax burdens on personal income. In addition, the dependent spouse would have to declare the amount received as taxable income, increasing their tax burden.

Moving forward, alimony payments will neither appear as deductions from a supporting spouse’s taxable income, nor will they appear as increases to the dependent spouse’s taxable income. These changes will apply to divorce or separation instruments, or modifications made to those instruments, executed after December 31, 2018. Agreements made prior to this date, and without modifications, will be subject to prior rules for deductibility.

The change, in theory, will bring in more tax revenue for the federal government, since the supporting spouse alimony is often taxed in a higher bracket than the dependent spouse. Under the new law, where alimony isn’t deductible, the supporting spouse will pay higher taxes. On a separate note, the new law places alimony payments in line with child support payments, as far as tax treatment goes.

So, what does this mean for divorcing spouses?  On the surface, it’s a boon to dependent spouses, since they won’t have to report their alimony receipts as taxable income; on the contrary, it appears to be financially detrimental to those ordered to pay alimony, as it strips the benefit of tax deductibility away.

In reality, what we may see is more stinginess on the part of supporting spouses, who will offer smaller amounts of alimony in light of losing its deductibility. So, too, may judges consider lowering alimony awards, since alimony payments are no longer “tax effected,” meaning that amounts were inflated to allow for taxes paid by the dependent spouse on the alimony income, in order to reach the court’s intended alimony award. While this is but one factor for the court’s consideration, it’ll be interesting to see how this element influences decisions in 2019 and beyond.

These situations can be complex and should always be reviewed in tandem by your divorce attorney and your CPA. We don’t pretend to be accountants at Warren Family Law, especially when there are a lot of good accountants to help make the determination of whether you’re better off with paying a higher, deductible amount versus a lower, non-deductible amount. In some situations, paying out less money is certainly better, while in others, perhaps paying more and being able to write off the entire amount is a better deal.

Based on these considerations, you may want to talk to a divorce attorney and a CPA to evaluate your options based on finalizing your agreement this year versus 2019. At Warren Family Law, we’ve been assisting clients with navigating the often financially complex waters of separation and divorce for more than 35 years. Give us a call to get started.