Federal Tax Reform Effect on Alimony Deductions in 2019

November 29th, 2018

Federal Tax Reform Effect on Alimony Deductions in 2019When parties file for divorce there are usually two main issues that need to be addressed before the parties will receive a decree in divorce:

  1. How the marital property is distributed between them – think: houses, bank accounts, investments, retirement accounts, etc.
  2. If one party must pay the other alimony. Alimony is not always awarded, but often awarded when one spouse earns much more money than the other spouse, a spouse cannot support themselves through reasonable employment and/or when the marital estate does not provide the parties with enough assets/funds for the one spouse (the lower income earner) to be self-supporting.

Because alimony payments vary in amount (and are substantial in certain cases) and can be ordered for various years, tax considerations play an important role in agreeing to an alimony payment or making arguments before the court on the amount and duration of an alimony payment. Before the new Tax Cuts and Jobs Act (TCJA), alimony payments could be deducted by the payer for federal income tax purposes before calculating what they owe in taxes, and recipients of alimony payments were required to report the payments as taxable income. However, under the TCJA, effective January 1, 2019, things will change dramatically – alimony payments are no longer tax deductible to the payer or included in the taxable income of the recipient. Therefore, for clients with higher incomes who stand to benefit substantially from the deduction, agreeing to alimony and/or equitable distribution prior to December 31, 2018 is essential. An alimony agreement executed prior to January 1, 2019 will still qualify for the annual deduction.

An article in the New York Times published in July 2018 headlined “’Hurry Up and Get a Divorce?’ For the Rich, There’s an Incentive” is worth a read. The article contributors recommend (as does Raffaele Puppio) that wealthier clients should attempt to finalize their divorce agreements prior to December 31, 2018.  The article states, “Eliminating the benefit will hit certain types of divorce couples harder, primarily those who earn vastly different amounts of income and are taxed at different rates.” Although on the surface the new tax law appears to favor the spouse receiving the alimony, the article points out that the change affects both parties as the payer “is going to have a lot of leverage to negotiate lower spousal support [alimony] in 2019.”

If you have been contemplating divorce, we recommend that you schedule a consult with one of the family law attorneys at Raffaele Puppio as soon as possible. All of our attorneys are well versed in the alimony laws and the tax changes to become effective January 1, 2019. Further, in the event your divorce agreement is not finalized before January 1, 2019, we can discuss different property distribution arrangements (using assets) to help reduce the effects of this new tax law. Despite the urgency in the title of the New York Times article, the real urgency is for those couples that have very little assets, but a large discrepancy in income.