Alimony In 2019 and Beyond

In contrast to many businesses that see activity decline in December, many divorce professionals are seeing dramatic increases in their workload. The answer, fortunately, has to do more with the timing of activity than an increase in unhappy couples. Due to provisions in the U.S. 2017 Tax Cuts & Jobs Act (TCJA), alimony payments in divorces finalized after December 31 of this year will no longer be tax-deductible to the payer or taxable to the recipient. The headline to this story is usually that, unless a divorce is finalized by year-end, an alimony recipient will receive “less alimony” than they would have under the old rules if a divorce is finalized in 2019. While this could be true (every divorce case is unique), who ultimately ends up receiving less (or paying more) could be different than many may now expect.

Those couples already divorced, or sprinting toward a last-minute settlement by the end of December 2018, may not be out of the woods. The TCJA also states that a modification of an existing divorce agreement in 2019 will trigger the tax treatment as outlined by the TCJA going forward. That means that every modification of agreement after the first of next year has the potential to be a windfall for the recipient (and an even larger pitfall for the payor) if the alimony structure isn’t revised as part of the modification.

The 2017 Tax Cuts & Jobs Act was a comprehensive reform of the U.S. Federal tax code, encompassing both individual and corporate tax rules. On the individual side, tax rates were generally lowered and the standard deduction doubled, but per-family-member exemptions were eliminated along with deductions for state and local taxes paid above $10,000 a year. Of particular note for divorcing couples, treatment for alimony becomes a straight cash transfer with no tax implications (as child support already is) as opposed to wage income as it has since the 1940’s (which is taxable to the recipient and deductible to the payor).

A good financial planner, especially one familiar with divorce issues, should be able to make a good start by calculating the value of an alimony payment stream under the new tax laws that is, on an after-tax, fully-loaded basis, of equal value to a payment for divorces finalized in 2018 and earlier that use the old rules. The new payment will almost certainly be lower than it would have been under the old rules, but this is simply because the recipient no longer has to pay any Federal income tax on the money. Recipients should focus their attention on the value of the after-tax payments, as these funds can be saved or spent on maintaining their needs. Focusing on the dollars they would have received under the old rules only to send along to the IRS can be mentally “taxing.”

The payor of alimony will also enjoy greater standard deductions and (generally) lower marginal tax rates. However, in addition to the loss of the “married, filing jointly” filing status due to the divorce and the elimination of personal exemptions under the TCJA, the payor is no longer able to deduct alimony paid from their income. This pretax alimony will be lower than it would have been had the TCJA not been passed but on an after-tax basis, the cost will likely be greater. Why? Because, as a general rule, payors of alimony make more money (and thus get taxed at higher income tax rates) than the recipients. The same dollar of alimony that is tax-free income to the recipient, then, is a loss of a deduction at the marginal tax rate of the payor. The upshot – the IRS will receive a larger share of a dollar of alimony in tax payments under the new rules than it did for divorces finalized before the end of 2018.

I will be working at a steady pace between now and year-end and beyond. Please don’t hesitate to reach out to me for assistance with your particular situation. I’m here to help!