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How is the new tax law impacting alimony?

When the Tax Cuts and Jobs Act (TCJA) passed in late 2017, much of the focus was on what tax breaks would be available. Unfortunately, for high-asset couples, the law’s implementation on January 1, 2019 also brings some changes to alimony that could complicate divorces.

Over the past several decades, alimony was considered taxable income for those who receive it and could be written off by those who pay it. Now, for any divorce finalized after December 31, 2018, alimony payers will have to include those funds in their income taxes while recipients can write them off.

This change does come with some historical precedent; in the 1917 case Gould v. Gould, the U.S. Supreme Court ruled that alimony paid to a “divorced wife” was not taxable as income. A tax bill in 1942 changed those tax standards to what U.S. divorcing couples have been accustomed to for over 70 years, and the TCJA is effectively changing those standards back. 

Acrimonious agreements

The new tax standard has the potential to make high-asset divorces more contentious. There are fewer dollars to divide between couples and could bump payers into higher tax brackets than they were in previously.

Another concern for already divorced couples is how the tax law could impact modifications. Depending on how a modification is written, it could change the payments so that they fall under the new tax rules. There are also concerns for existing pre-nuptial and post-nuptial agreements, as the new standards could nullify some items.

Anyone who in concerned about their financial future after divorce due to these changes can work with a family law attorney who is able to review any paperwork to help secure a positive agreement before finalizing, or ensure any existing agreements continue to work in their favor.

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