We blogged recently about the 2017 Tax Cuts and Jobs Act which, in part, eliminates the tax consequences of alimony. To briefly recap, alimony is tax-deductible to the payor and taxable as income to the recipient under the current tax laws. The Tax Cuts and Jobs Act, however, revises the tax code to completely eliminate a payor’s ability to deduct alimony payments and a recipient’s obligation to report them as income. To put the scope of these changes into perspective, the IRS reports that over 600,000 taxpayers claimed alimony deductions on their tax returns in 2015. The elimination of the taxability of alimony is scheduled to take effect beginning January 1, 2019, causing a bit of a panic amongst attorneys and litigants attempting to account for these substantial changes to the tax code. Enter the American Academy of Matrimonial Attorneys.
On November 15, 2017, the AAML announced its approval of a national resolution opposing the repeal of the alimony deduction citing the unavoidable, and potentially devastating, impact on a vast number of divorce matters across the country. More specifically, the elimination of the tax consequences of alimony will likely deal a particularly hard blow to low-income individuals, and even middle-class families where there are already limited assets which can be relied upon to provide financial security to divorcing spouses. It is also anticipated that the repeal of the alimony tax deduction will eliminate the income-shifting effect; this was advantageous in cases where the alimony recipient was in a lower tax bracket than the payor as the difference in the tax brackets benefits both the payor and payee alike.
The elimination of the tax-deducibility of alimony also removes a major negotiating tool from the divorce process. Eliminating a payor’s ability to deduct alimony effectively takes a bargaining chip off the settlement table and replaces it with a system that benefits only the alimony recipient, who would not have to report the support he or she receives from a former spouse. According to a February 14, 2018 survey of AAML members, a staggering 95% of all members surveyed stated that the new tax changes on alimony will drastically alter divorce settlement techniques. 64% of those surveyed stated specifically that they believe this will bring more acrimony to the already contentious process of divorce. Essentially, these revisions to the tax code will change not only the way courts make decisions regarding alimony, but also the manner in which alimony provisions of settlement agreements are negotiated. These concerns formed the basis for the AAML’s formal opposition to the repeal of the alimony tax deduction.
Family law attorneys and litigants alike will have to wait and see what impact, if any, the AAML opposition will have on the impending tax law changes regarding alimony before the January 1, 2019 effective date. Pending some movement on a legislative level, however, attorneys may be best served by beginning to prepare for a future without the includability and deductibility of alimony and working to fashion creative solutions that address the needs of a dependent spouse in a manner that is equitable to the supporting spouse. No easy task indeed.
The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.
Thomas A. Roberto focuses his practice on all aspects of matrimonial law, including but not limited to issues of custody, parenting time, child support, alimony and spousal support, equitable distribution, domestic violence, and prenuptial agreements. His practice is located in Obermayer’s Cherry Hill office. He can be reached at 856-857-1421 or at Thomas.Roberto@obermayer.com