Of the changes in the new Tax Cuts and Jobs Act (TCJA), one major one is the elimination of the deduction for alimony for the payor spouse in divorce agreements executed after December 31, 2018. These provisions could have a significant impact on divorces currently in process and will certainly change the landscape for all future divorces. The new rule won’t affect anyone already paying alimony. In addition, the payee spouse will no longer have to include alimony as income. These changes to the individual income tax are scheduled to expire at the end of 2025 (referred to as the provision’s sunset), if they are not changed by a new law before then.
Some of the effects from these alimony changes are not readily determinable. Oftentimes ex-spouses who receive alimony have been able to negotiate increased payments because that payment will reduce the tax liability of the ex-spouse paying the alimony. So, will the elimination of the alimony tax deduction now reduce the bargaining power of the ex-spouse receiving the alimony payments? The idea behind providing an above-the-line deduction to those paying alimony was that it made sense to shift the income tax liability from the (generally) higher income payor spouse to the lower income payee spouse. Divorce experts worry the change will make negotiations tougher and lead to less spousal support as cash goes to taxes instead.
Why did the government change this part of the code? Although payor spouses do, in most cases, claim a deduction for alimony paid, many payee spouses did not actually report the alimony payments in gross income as was required by the law, leading to millions of dollars escaping tax.
Because this new provision is set to sunset at the end of 2025, it’s unclear what could happen to the agreements that are executed during the seven years that the alimony deduction is eliminated. Will there be an opportunity for parties to go back to the negotiating table? And how will judges handle matrimonial cases in light of the new law?
Given the generally contentious nature of alimony agreements, as well as costs involved, this may not be practical, thereby resulting in headaches for many. Parties should engage a tax professional to help decipher the tax consequences. Every divorce agreement, prenuptial agreement and post-nuptial agreement should address the consequences of the new law, be completed (i.e., executed) prior to 12/31/18 if that is preferable, and contemplate the possible change and sunset of the provision.
Written by Alan T. Huberman, CPA, MST a Partner at BlumShapiro. Alan specializes in assisting individuals and businesses with complex tax situations.