Changes to alimony under the Tax Cuts and Jobs Act? ...who knew?
Divorce is unpleasant. Divorce is a more than a process of separating lives and protecting children…it’s also about dividing assets and negotiating the future. Divorce often involves alimony, and alimony, while often perceived somewhat differently by the two parties to a divorce, is a financial structure generally encouraged by the government to provide support to the lower-earning spouse for a period of time post-divorce, based on a variety of factors. The federal tax structure governing alimony was traditionally used to motivate negotiation between the parties, and to support success as individuals following the difficult process of separation. For many years, this structure has benefitted both spouses involved in a divorce.
On January 1, 2019, the federal government will roll out a new set of tax guidelines hidden within the Tax Cuts and Jobs Act that govern alimony payments. What is this new tax treatment, and how will it affect the payment of alimony between divorcing spouses?
A general goal of any government is to foster decisions that benefit society. A typical alimony settlement provides that alimony is paid by the spouse with the higher income to the spouse with the lower income. Under the current tax guidelines, dollars paid as alimony are not taxable income on the paying spouse’s federal tax return. Rather, that money is taxed at the appropriate rate on the receiving spouse’s federal tax return. Because the receiving spouse is also the spouse with the lower income, that money is therefore taxed at a lower rate. In effect, the paying spouse gets a tax break on alimony payments made to the receiving spouse, and the receiving spouse gets support payments for a defined amount of time. A benefit to both!
Divorces completed by the end of 2018 will not be affected by the upcoming changes to the tax law, and the new tax law will not affect any alimony payments made under pre-2019 divorce settlements once the new tax law kicks in. Any divorce settlement reached on or after January 1, 2019, will be subject to the new guidelines.
Under the new tax law, there will no longer be a reduced federal tax rate on alimony payments. Money paid as alimony will be taxed at the same rate as all income earned by the paying spouse, and the receiving spouse will pay no federal taxes on alimony payments received. The result? Not a windfall for the receiving spouse. Instead, a higher tax burden for the paying spouse, and less money to go around. One might ask if the government indeed believes this change will foster negotiation, if this change will ease the settlement of a divorce action, or if it actually serves to make a divorce more bitter. The change to the tax law eliminates the tax deduction for the high-paying spouse, and also arguably eliminates one of primary incentives for negotiating through and finalizing what can be a lengthy, emotionally-destructive, and costly divorce battle.
Whatever your perspective of alimony, whether you view it as a necessary financial support, a useful financial incentive, or merely a forced means to an end, we believe that negotiating a fair and effective divorce settlement requires not only a thorough examination of assets and liabilities, but also of future goals. Divorce is a highly-charged emotional event, embroiling spouses in conflict which often stalls any pathway to negotiation. Divorcing couples must consider that under any tax structure, tax break or no tax break, a divorce, consequential living apart, and disentwining lives results in financial trauma for all members of a family. However, divorce remains a necessary solution to what is so often a highly volatile situation.
Any person planning to divorce, regardless of income or assets, should seek the assistance of appropriate legal and tax advisors. The new alimony tax structure does little to ease divorcing couples or support simple negotiations. Let Linnane & Associates offer that support to you instead! We partner with you to find a solution that will ease the brunt of the trauma of divorce, and reach equitable outcomes that encourage your ongoing success. Don’t let the new tax law become a roadblock to your successful outcome…consult us for some guidance.
Kathleen Linnane is the Managing Partner of Linnane & Associates. Check back for our weekly blog updates about current legal issues of interest, and how changes and updates to the law might affect you and your community.