As the biggest change to the federal tax code in decades, the Tax Cuts and Jobs Act of 2017 (TCJA) will have a sweeping impact on how much individuals and businesses will have to pay the tax man. But what many people don’t realize is how the TCJA will also directly affect the world of family law, particularly divorce.
Although the TCJA’s provisions technically took effect on January 1, 2018, those that involve the taxability and deductibility of alimony/spousal maintenance will only apply to divorce and separation agreements after December 31, 2018. So, it might be in the best interest of anyone looking to file for divorce to weigh the risks and benefits of separating this year, while the tax changes have yet to take effect.
Here’s what you need to know about these new tax rules.
Alimony or spousal maintenance is a common solution to a disparity in the income of divorcing spouses, ensuring that the spouse with the lower income can continue a decent standard as part of a settlement or as ordered by a court.
Under Section 215 of the tax code, alimony payments used to be deductible by the supporting spouse.
Here’s where the TCJA changes things:
Section 11051 of the TCJA removes Section 215 altogether.
Alimony payments are no longer tax deductible by the supporting spouse, nor will they be considered as income to the recipient spouse. The TCJA removes such payments from the definition of gross income under Section 2016.
Moreover, income for alimony and spousal payments will be taxed at the higher supporting spouse rate instead of the previous lower rate of the recipient spouse.
Alimony payments will have the same designation as child support payments and will not be tax deductible by the supporting spouse nor taxable to the recipient spouse.
The TCJA’s new alimony provisions apply to:
Any divorce or separation instrument accomplished after December 31, 2018
Any divorce or separation instrument accomplished on or before December 31, 2018 and modified after the deadline, provided the revision uses language to comply with the new alimony provisions
In situations that allow for the deduction of alimony payments, the supporting spouse, who belongs to a higher tax bracket, will receive a deduction higher than the amount the recipient spouse, who belongs to a lower tax bracket, will pay on alimony as taxed income.
In other words, the after-tax net savings will only be available to the supporting spouse.
Other things to remember include:
Changes to alimony taxability and deductibility will directly impact the total net income of former spouses bound by child support guidelines.
The courts, family law attorneys, and mediators will have to consider the net income of each spouse to determine the appropriate amount of alimony and child support payments.
If you are in the middle of a divorce, you can file your taxes in one of two ways. If you are still married by December 31 of the tax year, you can file as married or married filing separately. How you choose could make a significant dent on how much taxes you will have to pay.