New Tax Law Changes Alimony Rules

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Divorce impacts a family in many ways. Taxpayers with an existing divorce agreement, or who are contemplating a divorce, should not overlook tax consequences which may affect the financial well-being of the family. Last December's Tax Cuts and Jobs Act (TCJA) made important changes to those consequences.

 

Prior to TCJA, payments that qualified as alimony were generally deducted by the former spouse paying them (the payor) and included as taxable income by the recipient (the payee). Over half a million payors claimed alimony deductions in 2015. TCJA repealed both sides of this provision - the payor can no longer deduct the expense, nor is it taxable to the payee. In effect, alimony will now be treated the same way as child support.

 

Importantly, existing alimony agreements are grandfathered under the old rules, so couples currently paying alimony will be unaffected by the changes. Also, the delayed implementation of the provision means couples contemplating divorce have several more months to design agreements that will be taxed under existing rules.

 

The loss of the deduction will likely increase the payor's income tax liability, while the payee will see a decrease in tax. The net result will often be detrimental to the payor, who is normally in the higher tax bracket. As a result, payors may push for lower alimony.

 

Alimony that is no longer deductible won't have to confirm to strict tax rules, giving the parties more flexibility in their arrangements. For instance, payments need not be in cash nor end upon the death of the recipient.

 

Effective Date Delayed

While most TCJA provisions are already in effect, the new alimony rules don't kick in until next year - for divorces after December 31, 2018. The delayed date gives spouses (and their attorneys) additional time to consider their options.

 

The rules will also apply to current agreements modified after that date, but only if the parties expressly provide that the new rules apply. This might be considered, for example, if the income tax brackets of the payor and payee change. Agreements that have not been modified continue under pre-TCJA tax treatment rules.

 

Contact Us

Please call your LMC professional to discuss the tax consequences of a divorce and the impact that the repeal of the alimony deduction may have on your situation. We are ready to explain the new rules to you and help in your negotiations.

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