Starting on January 1st, 2019, the country will have new tax laws that may affect alimony and divorce negotiations. It will apply to any divorce decrees finalized after the effective date, as well as separation agreements, agreements requiring spousal support, and other written agreements under the internal revenue code.
Elimination of the Alimony Tax Deduction
The greatest change the new tax law makes on family law is the elimination of the tax deduction for alimony. Prior to January 1st, 2019, alimony was a deductible expense for the payer. This means the person paying spousal support could list it as a tax deduction. In addition, the recipient of the alimony payments had to list it as income, and pay taxes on it as such. All of this changes with the passing of the new federal tax law.
Starting in 2019, the new code upends what couples have previously known about tax law and divorce/alimony. Now, couples who obtain divorce or separation decrees and have alimony payments will not have the benefit of tax deductions. The Tax Cuts and Jobs Act eliminates the alimony tax deduction for all couples divorced after December 31st, 2018. The payer will be unable to list alimony as a deduction, and the recipient will not have to pay taxes on alimony money.
How Does the Tax Law Affect Divorce?
Family attorneys are predicting the new tax law will make divorce cases messier for Pennsylvania couples. In the past, spouses were more likely to agree to an alimony provision and settle cases more quickly with the promised tax relief they would enjoy each year. Now that payers will no longer have this form of financial relief, attorneys are predicting more difficult settlement negotiations and more divorce cases going to trial. Lawyers and mediators will no longer be able to offer tax relief to alimony payers to move negotiations forward.
Tom Leustek, founder of New Jersey Alimony Reform, sent a report to state Gov. Phil Murphy expressing its potential impact on divorce and alimony. The report states that the two households a divorce creates cannot operate on as low an income as a single household. It says the new law has eliminated the tax structure that helps relieve the financial burden of the two households. Some are going as far as to say the new law will lower the number of divorces, since some couples may not be able to afford divorce without the alimony tax benefit.
The groundbreaking nature of the new federal tax law, as well as its newness in 2019, has led to a great deal of confusion. Attorneys and mediators are not sure whether to negotiate divorce cases differently, while divorced couples are asking if they have to modify existing alimony agreements to adhere to the new code. It is still unclear whether existing alimony agreements that require modification in 2019 will have to adhere to the new rules. Either way, however, the new rule will result in less money for the recipient, since the payer will have less income from which to pay the alimony without the tax deduction.
Discuss Your Divorce Case With an Attorney
Spousal support payers can no longer list alimony as a tax deduction. Recipients will not have to pay taxes on alimony, but this will not be a windfall since the recipient will get less from the payer. The recipient may also have a tougher time with retirement savings, since these accounts generally must use taxable income as contributions. Couples finalizing or modifying their divorces in 2019 will have to contend with the new federal tax law. Speak to a divorce attorney for counsel about your specific case before proceeding with your divorce.