The Effect the Tax Cuts and Jobs Act has on Alimony

  • By:Karpenski & Schmelkin

With the passage of the Tax Cuts and Jobs Act in December 2017, there comes a major change that impacts divorce: spousal support, or alimony, will no longer be tax deductible. As the law currently stands, alimony payments are tax deductible by the payor and considered taxable income to the recipient. Under the new law, it’s the opposite, making alimony tax neutral to both parties. Here’s what you need to know about how the Tax Cuts and Jobs Act will affect alimony:

When does it go into effect?

The tax bill will eliminate alimony tax deductions starting in 2019. So, alimony that is already in effect now or goes into effect by December 31, 2018 will remain tax deductible. Alimony agreements that go into effect after that date will be tax neutral. It is worth noting that alimony will remain tax deductible for divorced spouses who modify agreements as long as the original agreement occurred on or before December 31, 2018. Here in Massachusetts, we also need to be aware of how the state’s “nisi period” will affect the timeline.

Who benefits?

At first glance it might seem as if the new tax bill will favor the spouse who receives alimony, since they no longer need to claim it as income. However, this isn’t necessarily the case. That’s because the former spouse who is paying alimony has a greater interest in fighting to reduce alimony payments, since it’s no longer tax deductible to them.

What does this mean for the divorce process?

It’s expected that the new tax bill will make the divorce process for both parties even more arduous than it already is. Divorce settlements will likely become more difficult to reach since there will be a trickle-down effect, making decisions about issues like child support or separation of other non-monetary assets more complicated. The new tax bill will also need to be taken into consideration when drafting prenuptial and postnuptial agreements.

What are the other ramifications?

Some experts are predicting that there will be a spike in divorces in 2018, so that resulting alimony agreements will remain tax deductible. A divorce can become long and drawn-out, the new tax bill could give divorcing spouses the incentive they need to finalize their divorce in a timely manner. Another talking point is the possible long-term impact the new tax bill will have in relation to child rearing. Access to a higher alimony payment allowed a spouse to focus on raising children without worrying about money, but limiting alimony payments could result in more spouses focusing on their careers instead, in order to protect themselves.

As you can see, the new tax bill will “change the game” in regards to alimony. The effects are likely to be far-reaching for spouses who decide to divorce on or after January 1, 2019.

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Posted in: Alimony