The new year ushered in big changes in the federal tax law – one that now impact alimony payments. While the change directly affects how alimony is treated, it is expected to indirectly influence the way other settlement and divorce divisions are implemented as well.
Tax burden shifts under new tax law
Historically, the party paying alimony (the higher-earning spouse, who is the man in 97% of divorces) was permitted to deduct the payments for federal income tax purposes. The recipient then received the payments as taxable income. The Tax Cuts and Jobs Act reversed this, with the payer of the alimony bearing the tax burden and the recipient receiving the payments tax-free.
It is important to note that this change is not retroactive; it only applies to divorce agreements finalized or modified in 2019 or later. The old tax rules still apply to divorce and settlement agreements that were finalized by the end of December 2018. If former spouses who divorced before 2019 wish to proceed under the new tax structure, they may do so if they both agree and enter into a modification agreement.
Widespread effects of alimony tax change
The former tax structure of alimony payments has traditionally played a major role in divorce settlement negotiations. Because the payer received the tax deduction, it typically made it advantageous to both exes for the alimony payments to be higher.
By shifting the tax burden to the paying spouse, on the surface the change may appear to primarily benefit the lower-income spouse (who is more often the woman). However, the shift makes the payment more costly to the payer, and conceivably will lead to lower negotiated alimony payments to the recipient.
Knowing about the tax change in advance, there are other financial planning options that divorcing couples can take to compensate for the effects. For example, changing the way property is treated in the settlement agreement may reduce the impact of the alimony tax. For some couples, the child tax credit may also provide some relief. However, it is hazardous to become creative in your settlement terms without the help of a knowledgeable lawyer; to be treated as alimony, payments must meet certain requirements or they could be characterized as child support or something else.
NY and NJ court response remains to be seen
Many former couples come to an agreement on settlement terms, which are then formally entered by a court. When the couple cannot agree, they may head to litigation and leave it to judges, magistrates, and mediators to hash out. There is no indication yet of whether jurists will factor in the tax changes in issuing spousal support decrees. Having a well-prepared and experienced attorney is the best way to minimize the uncertainty.
Law changes can always cause a period of uncertainty in divorce proceedings. If you are anticipating a divorce in Bergen County, New Jersey, or in Rockland County, New York, trust an experienced divorce lawyer from Kantrowitz, Goldhamer & Graifman, an established firm that has successfully navigated many changes over the past 40 years. Call today to schedule a confidential consultation.
- MarketWatch, New tax law eliminates alimony deductions – but not for everyone, https://www.marketwatch.com/story/new-tax-law-eliminates-alimony-deductions-but-not-for-everybody-2018-01-23
- CNBC, How to manage your divorce as new alimony tax rules go into effect, https://www.cnbc.com/2018/12/18/this-checklist-can-help-you-manage-your-divorce-after-new-alimony-tax-rules-go-into-effect.html