By now, you might have heard about the tax law signed by President Trump just days before we celebrated the start of 2018. Maybe you even noticed a change in your most recent paycheck. That’s because the new tax rates affect how much money is withheld by your employer. Something you may not be thinking about, though, is how the new tax law could make changes to alimony or affect your divorce– but it very well could.
For over seventy years, a divorced spouse paying alimony has been able to claim a tax deduction for those payments, while the other spouse pays taxes on the money received. The new tax law eliminates the tax deduction for alimony payments, and will apply to all divorces resolved after December 31, 2018. If you are in the midst of a divorce, considering divorce, or plan to sign a premarital agreement in the near future, you should talk with a family law attorney to find out exactly how the new tax law could affect you. In the meantime, let’s consider some of the most common questions on this topic.
I pay alimony to my ex. Can I still claim the tax deduction for these payments after December 31, 2018?
The new tax law will not apply to divorces or separation instruments resolved before December 31, 2018. If you are already paying alimony or begin paying alimony before the end of this year, pursuant to a court order or separation agreement, you will be grandfathered in under the current tax law. This means, you will still be entitled to the tax deduction for alimony you pay and your ex will continue to pay taxes on the alimony they receive.
What happens if I start to pay or receive alimony after December 31, 2018?
If you start to receive alimony after December 31, 2018, those payments will no longer be considered taxable income. In other words, you won’t have to pay taxes on this money. If you start to pay alimony after December 31, 2018, those payments will no longer be deductible from your income. In other words, you will no longer be able to reduce your taxable income by those payments. This means the spouse paying alimony, rather than the one receiving alimony, will be responsible for paying the taxes at their tax-rate. In other words, by not allowing the deduction, all of an alimony-paying individual’s income will be taxed. If a party were to modify an existing arrangement regarding the payment of alimony, it could be possible to lose the grandfathered status of a pre-2019 agreement. Be sure to consider; these factors, and whether a modification is a possibility.
If you are the former spouse who stands to receive alimony, this may not sound so bad. There are less obvious consequences to this new treatment of alimony, though. An experienced family law attorney can explain, in more detail, how it will likely unfold in your particular situation, but the alimony tax deduction has long been a bargaining tool used in negotiations. Attorneys could push for increased alimony payments because, although the former spouse would be agreeing to pay more, he or she would benefit from a greater tax deduction. That won’t be the case come 2019 and could mean long, contentious litigation for some as settlement becomes more difficult.
My fiancé and I are signing a premarital agreement before our wedding this spring. What effect does the new tax law have on our agreement?
Hopefully, you enjoy a long, happy marriage and the terms of your agreement that set out what happens in the event of a future separation and divorce never take effect. If you do divorce, after this year, the new tax law will govern your alimony arrangement. As such, the payments cannot be deducted by the paying spouse and will not be considered taxable income to the other spouse. This is true even if you sign a premarital agreement before December 31, 2018, because only divorces resolved before that date are grandfathered in under the current tax law. This is also true even if your agreement states that the current tax law will apply. Unfortunately, contractual language does not trump the rules of the IRS!
Keep in mind, these are general answers to some common questions and are just the tip of the iceberg. If you have questions about how the new tax law might affect you, contact an experienced family law attorney as soon as possible to make sure you understand what lies ahead – because change is coming.