For decades, alimony payments were tax-deductible. If you agreed to pay alimony as part of the divorce process (or if a court ordered you to pay alimony in a contentious divorce), you were entitled to deduct your payments from your gross income on your federal tax return.
As of 2019, this is no longer the case. For divorces finalized after January 1, 2019, under the Tax Cuts and Jobs Act alimony payors are not entitled to a tax deduction. Instead, payors must pay federal tax on income they pay to their former spouse, and their former spouse no longer owes an income tax obligation to the Internal Revenue Service (IRS).
Why Did Congress Terminate the Tax Deduction for Alimony?
If you are preparing to go through a divorce and thinking you might have to pay alimony, this probably seems unfair. Why should you pay tax on income that you immediately hand over to your former spouse? Why should your spouse be entitled to receive alimony (which is a form of income) tax-free?
The theory behind the alimony provisions of the Tax Cuts and Jobs Act is that it will result in an increase in federal income tax revenue. Data suggested that while alimony payors routinely take their tax deductions, recipients do not always report and pay taxes on alimony like they are supposed to. By reversing the tax treatment for alimony, payors will be required to report all of their income to the IRS (subject to any other relevant deductions and exemptions), and this means that the IRS will be more likely to receive taxes on the portion of payors’ income used for alimony. Additionally, since alimony payors tend to be in higher tax brackets than alimony recipients, a higher percentage of each alimony payment will become federal income tax paid to the IRS.
But, while this makes sense in concept, there are a number of glaring concerns. Among them, the reversal of tax treatment for alimony under the Tax Cuts and Jobs Act is going to make negotiating alimony a much less attractive option for many high-earning spouses. Additionally, since there are other ways to achieve tax savings during the divorce process, it remains to be seen whether the new law will actually generate additional federal income tax revenue.
Does the Reversed Tax Treatment for Alimony Apply to Divorces Completed Prior to 2019?
Initially, no, the Tax Cuts and Jobs Act will not affect divorces finalized prior to 2019. In fact, if you continue paying alimony under your current divorce settlement or court order and never seek to modify it, then the reversal of the tax treatment for alimony under the Tax Cuts and Jobs Act should not affect you at all.
However, if you or your former spouse seeks to modify your current alimony payment obligation, then the Tax Cuts and Jobs Act could come into play. The law states:
“The amendments made by this section shall apply to . . . any divorce or separation instrument (as so defined) executed on or before [December 31, 2018] and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.”
If you and your spouse agree to modify the terms of alimony, or if you or your spouse successfully petitions the court for a modification, then the Tax Cuts and Jobs Act’s new tax treatment will apply if expressly called for in the modification. In other words, when modifying an existing alimony award, former spouses will automatically retain their pre-existing tax treatment unless they “opt in” to the reversed tax treatment under the new law.
How Might the Elimination of the Alimony Tax Deduction Affect My Divorce?
Let’s say you are thinking about getting divorced in 2019. How, if at all, will the Tax Cuts and Jobs Act affect your divorce?
As with most legal questions, the simple answer is, “It depends.” Alimony is not awarded in all divorces; and, if neither you nor your spouse is entitled to alimony, then the new tax rules will not come into play at all (although, the Tax Cuts and Jobs Act could still impact your divorce in other ways, such as through the elimination of the child tax credit through 2025).
However, if you or your spouse is entitled to seek alimony, then you will need to factor the Tax Cuts and Jobs Act’s reversed tax treatment into your divorce. Some of the issues you may need to address include:
- Alimony – Should you agree to an alimony award at all? If so, in what amount and for how long? If you will be paying alimony, how much can you afford to pay while still maintaining your lifestyle in light of the new tax rules?
- Property Division – Are there tax-advantaged ways you can divide your marital property in order to minimize or eliminate alimony in your divorce? Would you be willing to give up a larger share of your marital estate in order to avoid paying alimony (or, would you be willing to accept a larger portion and forego alimony payments)?
- Child Support – Since parents’ child support obligations are means-based, how will paying (or receiving) alimony affect your obligation to pay child support? If you already have a child support obligation from a prior relationship, how should this impact your financial obligations in your current divorce?
These are complicated questions, and how you answer them could impact your life for years or decades to come. As with all aspects of getting divorced, it is important to make informed decisions about alimony, and to make sure you have a clear understanding of how the law applies to your personal circumstances.
Contact the Alpharetta Divorce Lawyers at Hait & Kuhn
If you are contemplating a divorce and would like more information about the tax considerations involved, we encourage you to contact us for a free initial consultation. To speak with one of our experienced divorce lawyers in confidence, please call our Alpharetta law offices at 770-517-0045 or request an appointment online today.