New Tax Law Alters Alimony Deduction, Divorce Strategy

Alimony deductions are gone in 2019, and while payees won't be taxed on the payments, they'll also work harder for it during divorce negotiations.

Effectively, the change is a financial loss for the person paying alimony and a windfall for the person receiving it. But ultimately, the change stands to limit the amount of alimony the payee receives in a divorce

That likely complicates new divorces, but divorce attorneys at Swanson & Moors, LLC are ahead of what this means for our clients on both sides and can help prepare for the impact, whether you are involved in an ongoing divorce or are receiving alimony payments from a previous divorce.

The change began Jan. 1, 2019, one of the many alterations in the tax law made by the sweeping tax code update created by the Republican Tax Cuts and Jobs Act, passed into law in December of 2017. The change gave corporations a permanent tax break, a temporary tax break for individuals, and reduced the tax penalty compelling health insurance, known as the individual mandate in the Affordable Care Act, to zero.

It also eliminated deductions for alimony payments required by divorce agreements made after Jan. 1, 2019. Pre-2019 divorce agreements are unaffected by the change, but that doesn’t necessarily mean they’re immune to the implications of the shift.

Couples who have already divorced considering renegotiating their divorce may also need to more carefully examine those pros and cons versus letting an old divorce agreement lie.

Higher-income spouses now have an added incentive to argue to pay less in alimony, while lower-income spouses have less reason to worry about the amount of their payments, which they will receive tax-free.

The situation understandably raises several new questions for both members of a divorcing couple, and complicates divorce agreements the parties are attempting to renegotiate. The changes underscore the need for a divorce attorney, who in turn may well require the services of a CPA, to help negotiate the best path for divorcing couples.

Admittedly, the law is not straightforward, but then, divorce law has never been as clear as it should be. In the Bay State, for instance, the Massachusetts Alimony Reform Act of 2011 sought to clear up some of the confusion, sharply curbing lifetime alimony payments in divorce cases, among other changes.

The American Academy of Matrimonial Lawyers has weighed in with a few key points about the loss of alimony deductions:

  • Middle class families may be affected more by the new law. The financial effect varies by tax bracket for each former partner.

  • For pre-existing divorces, the alimony agreement needs to be in a final settlement or court order – not a temporary agreement – in order to maintain the deduction.

  • Even if you are not going through a divorce, check with your attorney if you have a premarital agreement that includes an alimony provision. The agreement could be tied to assumptions about taxes that are now out of date.

Also, bear in mind that the 2017 tax law has also eliminated the $4,050 exemption for each dependent, through 2025, which will further complicate divorcing spouse’s efforts to navigate the financially challenging time.

According to a CNBC report, the old tax deduction stood to save up to 50 percent in taxes for top earners in high-tax states. So a $50,000 alimony payment would only cost the payer $20,000 after-tax. The recipient might only pay $10,000 on that $50,000 payment, saving the family a total of $40,000.

But the “divorce subsidy,” as the deduction was known, often prevented divorces from going to trial, since a large part of a divorce hinges on financial concerns. Now, the American Academy of Matrimonial Lawyers reports, the new alimony rules will likely change how divorces are settled. For instance, it may now become more difficult to negotiate alimony payments from payers during a divorce.

Swanson & Moors, LLC, divorce lawyer Kelli S. Moors is well prepared to draw on 15 years of family and divorce law to help divorcing couples navigate the code, including the new wrinkles just added to the process.

Don’t hesitate to schedule a free consultation with Moors and have your divorce handled by an experienced attorney.

Swanson & Moors, LLC serves all of Plymouth County, Bristol County, Norfolk County, and Barnstable County. Call today.