Tax Reform: How it Impacts Alimony

This article looks at how federal tax reform law will end up impacting divorces containing alimony agreements.

The federal tax reform law, known as the Tax Cuts and Jobs Act (TCJA), which was signed into law by President Trump last year, is a major piece of legislation hundreds of pages long. As a result, it is easy to overlook some changes brought about by the law that could nonetheless have a huge impact on many families. A case in point is the way divorcing couples will be taxed beginning in 2019. That's because, as CNBC reports, the tax reform law shifts the alimony tax burden away from the recipient and onto the payor.

Shifting the Tax Burden

For more than 75 years, those who pay alimony have been able to deduct their alimony payments on their taxes. On the other hand, recipients of alimony have been required to declare the alimony payments they receive as taxable income.

TCJA completely changes this situation, however. For divorces that are filed or modified after December 31, 2018, those who receive alimony will no longer have to declare their payments as income, while those who pay alimony will no longer be able to deduct those payments. In effect, this means that the alimony tax burden shifts from the recipient to the payor. The changes only apply to divorces, separations, or modifications that are filed on January 1, 2019 and later. Divorces from before then will still be treated according to the old tax rules, unless they are modified on or after that date.

It's not a Tax Break for Recipients

On the surface, the change looks like a tax break for alimony recipients, since the alimony they receive will now be tax-free. However, as the Virginian-Pilot newspaper reports, in effect the changes will likely squeeze both payors and recipients financially. Because payors are usually in a higher income tax bracket, the amount they are able to deduct on their alimony payments is usually larger than what recipients currently pay in taxes on that alimony. That means that payors will simply have less room to negotiate higher alimony payments, which in turn will mean less money for recipients.

Another complicating factor is the fact that many states have alimony guidelines that are built around federal tax law. Once those guidelines are updated, the effect will be lower overall alimony payments to reflect the fact that the deduction is no longer available for payors. Therefore, in effect the shifting of the tax burden from the recipient to the payor simply means a greater share of money that would otherwise have gone to alimony payments will instead go to taxes.

Talking to a Tax Attorney

Recent federal tax law changes are a reminder of why those who have tax issues that need to be resolved should get in touch with a tax attorney as soon as possible. Whether the IRS is threatening an audit or is demanding back taxes, an attorney can represent clients and help defend their rights and best interests in these often complicated cases.