Tom represents clients in all aspects of matrimonial law matters involving issues of custody, parenting time, child support, alimony, equitable distribution, domestic violence, adoptions, and prenuptial agreements. He handles all stages of...Read More by Author
The Revised U.S. Tax Code’s Impact On Alimony
By now most people are aware of the impending changes to the U.S. tax code brought about by the GOP tax bill, dubbed the “Tax Cuts and Jobs Act,” which Congress voted to pass on December 20, 2017. These substantial changes, which are widely regarded as the most significant overhaul of the tax code in last 30 years, have driven matrimonial attorneys and litigants into a frenzied state as they try to determine the impact of these changes on alimony awards.
One of the modifications presented via the tax bill was to eliminate the tax consequences of alimony. Under the current tax laws, alimony is tax-deductible to the payor and taxable as income to the payee. The revised tax code, however, completely eliminates the payor’s ability to deduct, and the payee’s obligation to report, alimony payments. Although at first blush this may seem beneficial to the recipient, the end result will find both payors and receipts of alimony with less money to go around. Whether or not these sweeping changes will impact your alimony case may depend on a number of factors, primarily the timing of the order or agreement addressing alimony.
It is anticipated that the tax code modifications on the treatment of alimony will not be effective until 2019. Specifically, the current rules on alimony (deductible to payor, taxable to payee) will remain in effect through December 31, 2018. The elimination of the tax consequences of alimony would begin January 1, 2019. So, if you have an agreement or order for alimony entered on or before December 31, 2018, the taxability/deductibility of alimony would remain in effect. There is, of course, at least one wrinkle: If your order or agreement for alimony entered on or before December 31, 2018 is later modified after December 31, 2018, and if the modifying order or agreement specifically references the tax code revisions, the new tax rules will apply and the tax consequences of alimony would be eliminated.
The extent to which these significant changes will impact divorce settlement negotiations, and the manner in which they will be treated by the courts, remains to be seen. What is apparent, however, is that any individuals currently contemplating divorce may be best served by initiating the divorce proceeding now, before the end of 2018, to take advantage of the tax benefits of alimony while they still can.