Late last year the new tax bill, the Tax Cuts and Jobs Act, was signed by President Trump. The aim of this bill, as with other tax bills, is to reduce the national deficit and create jobs. But these benefits come with a major change to divorce law that will have a major impact on the outcome of divorce agreements and alimony terms, causing divorce proceedings to become more time consuming and expensive.
What Is Alimony and How Is It Currently Taxed?
With new leadership comes new laws and changes, and this new tax bill is no exception. The Tax Cuts and Jobs Act creates major changes to alimony, specifically, how it will be taxed. Currently, alimony is defined as the monetary support provided to the lower income-earning spouse following divorce. Its main purpose is to assist the lower-income spouse’s transition into a self-supporting role. Alimony payments end upon the death of the paying spouse or remarriage of the spouse receiving alimony, unless otherwise stated by the court. These aspects will not change as a result of the new bill; however, the taxation of alimony will. The current laws state that alimony is considered income for the recipient and a tax deduction for the spouse paying, but this new tax bill, if passed, would change all of that.
How Will Alimony Change as a Result of the New Tax Bill?
In the new tax bill, starting 2019, alimony would be paid out of post-tax dollars and the recipient would not be taxed on the funds they receive. The goal of this change is to help reduce the discrepancies that the IRS saw between those who filed for alimony tax deductions and those who reported alimony income. In theory these numbers should always be equal, but this past year $2.3 billion went unreported as alimony income. This means that there were ex-husbands and ex-wives reporting the money they paid for alimony, and their ex-spouses were not reporting this income, which means they were not paying taxes on it. With this change, the new leadership hopes that only putting the responsibility on those paying the alimony would help to ensure the collection of these funds.
How Will This Impact Divorces Overall?
This bill will have a heavier impact than legislators may have imagined on how lawyers, judges, and couples make divorce decisions. One of the first things to note is that this new bill will only affect divorces happening after December 31st, 2018, so if you have already gotten a divorce, or are looking to get one in 2018, this is not a change you’ll need to worry about. For those looking to get a divorce in 2019, the lack of tax benefits could impact the higher-income spouse’s decision of agreeing to alimony. The tax deduction has always been a tool that lawyers have used when negotiating alimony, but without this provision, a divorce lawyer now has less leverage when negotiating these aspects into the divorce agreement. That means divorce cases with alimony involved will require more litigation and longer trials for these couples. This will possibly add to the stress and economic impact of the divorce trial, something no lawyers want for their clients. The absence of alimony payments can also affect how marital property is split up.
To add to these changes, without the tax deduction from alimony, judges will have to calculate how much alimony the higher-income spouse will be paying differently, which will essentially result in the paying spouse paying more, or the receiving spouse receiving less.
With finances being such a principal factor for the couple, the judge, and the lawyer in divorce cases, all couples should stay aware of changes to any laws affecting alimony, child support, or marital property. Shah & Kishore makes a strong effort to stay on top of all laws surrounding these issues, so we can keep you informed and ready for any changes to come.
To learn more about how we can help you with your particular situation, please email or call us today at (301) 715-3838 to set up your FREE consultation.