IF YOU ARE THE SPOUSE THAT WILL BE PAYING ALIMONY, GET DIVORCED NOW BEFORE 2018 ENDS OR PAY MORE TAXES!
The new Tax Cuts and Jobs Act (TCJA), recently signed into law on December 22, 2017 by President Trump, will have many consequences for taxpayers–some good and some bad–depending on variables like where you live, what income bracket you’re in, and whether or not you own property. Add to that list your marital status. Beginning on January 1, 2019, alimony payments originating from marital settlement agreements made after January 1, 2019, will no longer receive the same tax treatment as it has had for nearly seventy-five (75) years.
As it stands currently, the general rule for alimony is that it is tax-deductible to the person paying it and taxable to the person receiving it. After December 31, 2018, this rule no longer applies. For people in the midst of a divorce, the change in law is good news and bad news: good for the party set to receive alimony (because they will not be forced to pay taxes on alimony), and bad for the party who will be paying it (because they will not be able to use it as a tax deduction). Traditionally, the ability to at least reduce tax liability has served as some small financial comfort for people who ultimately pay to their spouse significant sums of money through alimony, over potentially extended time periods. Traditionally, the tax deductibility of alimony has been one of many useful tools in the toolbox of divorce attorneys in negotiations to help bring settlement. It allows both parties to get some economic benefit out of the situation. Moving forward, lawyers will no longer have this tool at their disposal.
Under the current tax laws, there are some requirements for alimony to be tax-deductible to the person paying it. Some of those requirements are:
- The provisions for alimony must be in a written instrument.
- It must be specified that the payment is for alimony, and not child support.
- Ex-spouses must not be living in the same residence when alimony is being paid. Additionally, ex-spouses cannot file jointly on their tax returns for the term of alimony.
- The alimony must be paid in cash, or some other cash-equivalent. Alimony cannot be conveyed via property (i.e. homes or vehicles).
- There must be no obligation that alimony must still be paid after the death of the person paying it.
Digging deeper into the consequences of this new provision of the tax bill, most divorce and family law lawyers seem to believe the inability to deduct alimony payments for tax purposes may cause a reduction in the use of alimony in negotiated divorce cases. Not when there are other options in which to divide property with more advantageous tax consequences. Regardless of the future implications, couples currently going through a divorce still have the opportunity to use the old tax scheme to limit their tax liability when dividing up the marital property in a divorce – a step which is called Equitable Distribution in Pennsylvania. Divorce cases already settled will not be effected. For divorces that have been initiated but not yet completed, all settlement agreements executed (signed) on or before December 31, 2018, the old law will still apply.
Due to this change in law relating to tax deductibility of alimony, it appears that the remainder of 2018 is a good time to attempt to settle your divorce if you will ultimately be the one paying alimony. On the other hand, if you are the one who will likely be receiving alimony, the change in the tax law may incentivize you to put off the divorce until after the new tax law takes effect in 2019. For the spouse who is likely to receive alimony, it may also be a good time to take a more aggressive stance in settlement discussions due to the knowledge that your soon-to-be former spouse may desire to take advantage of the tax deduction for alimony under the old law.
Here is a general checklist a person going through a divorce who will likely be paying alimony should follow:
- Obviously, push forward with divorce settlement before the end of 2018 if you wish to reap the rewards of favorable tax treatment of alimony.
- Do the cost/benefit analysis of how much in taxes you will pay versus what you would be able to deduct under current tax structure. There are calculators online to help aid you in this.
- Sit down with a knowledgeable divorce attorney to discuss your divorce and how the new tax bill (the TCJA) will affect your situation.
If you have questions about divorce and whether you will be receiving or paying alimony, a good place to start is calling the Law Offices of Gregory P. LaMonaca, P.C., at (610) 892-3877. We have a dedicated staff comprised of seven (7) family law attorneys who can help assist you in this challenging time.