With the passing of the Tax Cuts and Jobs Act (hereinafter “Act”), Americans everywhere are trying to determine how these changes will affect their wallets. One area clients will want to pay particularly close attention to is the changes made to the tax treatment of alimony.
Under current rules, an individual who is obligated to pay alimony may deduct these payments as an “above-the-line” deduction. Conversely, alimony is taxable to the recipient spouse.
The Act, however, reverses the current rule. For Judgments of Divorce entered after 2018, the payor spouse will not be able to deduct alimony. Correspondingly, recipients of alimony will not have to include the payments as part of their gross income. It is important to emphasize that these new rules will only apply to Judgments of Divorce entered after 2018. Judgments of Divorce entered prior to 2019 will not be impacted under the Act, unless modified as detailed below.
The Act may impact the modification of a pre-2019 Judgment of Divorce only in limited circumstances. Under a special rule, if taxpayers have an existing (pre-2019) Judgment of Divorce and they have that agreement legally modified, the new rules will not apply to that modified decree, unless the modification expressly provides that the Act rules are to apply.
Clients looking to enter into prenuptial agreements should also pay close attention to the Act. Provisions related to alimony are often included in prenuptial agreements and clients would be wise to understand the impact the Act will have on their finances should they ultimately get divorced.
While it is too early to gauge the full impact of the Act on divorcing couples, there is a growing concern that this change will lead to less money in the pockets of families and more money in the pockets of Uncle Sam. Generally speaking, because recipients of alimony are usually in a lower tax bracket than the payor, the deduction allows families to lessen the burden of their tax bill. Without this flexibility, the Act will likely make negotiations all that much tougher.
Clients and practitioners should review the Act carefully. Ultimately, every case is fact specific and clients should reach out to a member of the Casner & Edwards Family Law department to determine how the Act will impact them.