Alimony Considerations with the New Tax Law

If you are in the middle of divorce proceedings, the new Tax Cuts and Jobs Act (TCJA) may give you a big incentive to move quickly and have your divorce agreement finalized and signed by December 31, 2018. Or it may give you a big incentive to do the exact opposite – wait until after January 1, 2019, to execute the agreement. It all depends on whether you’ll be making alimony payments, or receiving them.

Alimony rules have been historically frustrating, mostly because every state has its own rules about the amount and length of payments. “There’s not really a cohesive rationale for alimony,” Mary Kay Kisthardt, a professor of law at the University of Missouri-Kansas City School of Law, told MSNBC. “In any given state, we’re not sure what we’re trying to do.”

One rule has been clear for all alimony arrangements, up until now. Currently, the payers of alimony can deduct the payments from their taxes, and the recipients had to list it as taxable income. That is still true for agreements executed prior to 2019. Starting January 1, 2019, for all agreements executed after this day, alimony will no longer be deductible for the payer, and taxes don’t have to be paid on it by the recipient.

Before and After

For payments required under divorce or separation instruments that are executed after December 31, 2018, TCJA eliminates the deduction for alimony payments, according to MarketWatch. This will apply to payments that are required under divorce or separation instruments that are:

  1. executed after December 31, 2018, or
  2. modified after that date if the modification specifically states that the TCJA treatment of alimony payments (not deductible by the payer and not taxable income for the recipient) now applies.

“If you are in divorce proceedings and want deductible alimony treatment for some or all of the payments that will be made to the other party, the TCJA gives you a huge incentive to get your divorce agreement wrapped up and signed by December 31, 2018,” writes Bill Bischoff in MarketWatch. “On the other hand, if you will be the recipient of payments, you have a big incentive to put off finalizing your agreement until next year, because the payments would be tax-free to you.”

New Law Could Be Expensive

On the surface, it looks like the TCJA will benefit alimony recipients – who will not have to pay taxes on alimony – and not alimony payers, who won’t be able to deduct the payments from their own taxes. But some experts are warning that the payees could suffer as much or more than the payers.

The changes are likely to bring in less money for the recipient because the payer will “have less money from which to pay” without the deduction, Ken Neumann, director of the Center for Mediation and Training in New York City, told MSNBC. He provided a hypothetical example:

In 2018, a man earning $500,000 a year and who is in the top tax bracket pays his ex-wife $100,000 a year in alimony, but it only costs him $50,000 after the tax break. The ex-wife owes $25,000 in taxes, leaving her with $75,000. If the agreement were executed after 2018, the man could argue that he could only afford $50,000 – which would leave the ex-wife with $25,000 less each year, Neumann argued.

Untangling a Messy Law

The change could make divorces messier, Justin Reckers, a divorce financial analyst, told MSNBC. Offering tax relief for alimony payments often helped move negotiations along, he said.

“It’s a lost tool for the purpose of settling cases outside of the court system,” he said. “You might see more cases go to court now.”

It’s always important for parties to a divorce to seek qualified legal assistance, but in a shifting legal landscape, each party is especially vulnerable. The divorce attorneys at Lusk Law, LLC, will help protect your interests during a divorce and ensure that any outcome is the best for you and your children’s happiness and health. Contact us today online or by phone to request a consultation.

Maryland Association of Paralegals

On September 18, 2018, Lusk Law’s paralegal, Anne Wolf, was a featured presenter at the Maryland Association of Paralegal’s MAP U#5, held at the Community College for Baltimore County.…