As if negotiating divorce settlements was not complex (and contentious) enough, the process is about to get even more complicated, thanks to a major overhaul of the tax code regarding alimony. Under the Tax Cuts and Jobs Act (TCJA), which goes into effect January 1, 2019, sweeping changes are set to upend 75 years’ worth of established rules regarding alimony — namely, that it is deductible for the payer and is taxable for the recipient. As of the new year, this equation is completely turned on its head: For all divorce decrees finalized after December 31 st , 2018, payers will no longer be able to deduct alimony from their taxes, and recipients will no longer be required to pay taxes on alimony received.
Family law attorneys are being flooded with questions regarding these dramatic changes, and although there are still some areas that have yet to be fleshed out, there are a number of things that are either likely or certain to play out. Here is what we know:
- Alimony will no longer be tax deductible for the payer. For all divorce decrees finalized on or after January 1, 2019, the tax deduction is eliminated.
- Taxes on alimony will no longer have to be paid by the recipient. For those receiving alimony in accordance with a divorce decree finalized on or after January 1, 2019, this payment is no longer considered taxable income.
- The changes should not be seen as a windfall for alimony recipients. Though the financial burden on alimony payers brought about by the TCJA is clear, there are also potential burdens to recipients. Payers can potentially make the case that they have less money to pay from without the tax break, resulting in overall lower payments. Additionally, the changes may impact a recipient’s ability to contribute to a retirement account since those contributions must come from taxable income. Alimony will no longer count as such.
- The TCJA changes will likely make reaching a settlement more difficult, as tax relief will no longer be able to be offered to payers as a bargaining point.
- Changes only affect those decrees finalized after the new year. For any decrees signed on or before December 31, 2018, things remain business as usual. However, for agreements amended January 1, 2019, or thereafter, it remains unclear by which tax structure they will be governed.
It cannot be emphasized enough how sweeping these changes are, and how important it is to make sure you are being given clear advice on how they will affect your situation. With a combined 30 years of experience practicing family law in Missouri, Raza & Jones is here to help you navigate these changes. For questions or to receive explanations regarding what the TCJA means to you, please call us at (314) 449-8830.