The New Tax Code and Alimony: What You Need to Know
On Friday December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. This bill will make significant adjustments to both individual and corporate tax rates as well as various other terms and provisions of the Internal Revenue Code. A very important provision of the new tax legislation that will impact many parties going through divorce is the change to the deductibility of alimony and other support payments.
Previously, alimony payments for support and maintenance of the spouse were fully deductible from the gross income of the payor and included in income of the recipient. This differs from support for children and the division of assets (equitable distribution) in a divorce, both of which are tax neutral and do not cause any tax liability for the party receiving nor any tax break for the party paying. Until now, an award of alimony shifted income taxes from a higher earner who was taxed at a higher rate to the lower income earner who was taxed at a lower rate. As such, alimony was a commonly used tool in divorce settlement negotiations to enable the parties to reach a win-win resolution. For example, an alimony award would be 90-100 cents on the dollar to the recipient but, to the payor, it would be only 70 cents on the dollar due to their tax deduction.
With the recent amendments to the tax code, this will no longer be the case as dollars paid as alimony will now be tax neutral, with no deduction to the payor and not includable in the income of the recipient. As such, there will be no way to generate the type of tax savings previously associated with alimony payments. This provision will be applicable if an agreement or order for alimony is entered into after December 31, 2018. The change also applies to certain amendments to pre-December 31, 2018 agreements or orders that are modified or amended after that date.
This change in alimony may have wide sweeping implications for the ability to settle any cases with a disparity in income. We anticipate there may be a rush to resolve cases prior to the December 31, 2018 deadline and will assuredly impact resolution of domestic relations cases going forward
If you want to learn more about this change to the tax code or want to discuss how it may impact your divorce, contact one of our attorneys.