New Rules: Alimony Under the Tax Cuts and Jobs Act

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The Tax Cuts and Jobs Act (TCJA), a tax reform into law, was signed into law in 2017 to address the growing national debt. The TCJA reduces individual income and corporate tax rates, abolishes personal exemptions, and doubles the standard deduction.

The tax reform promises many positive effects, such as lowering the tax percentages for the low- and middle-income class and increasing the responsibility of high earners, simplifying the tax code, and eliminating special interest loopholes.

The TCJA affects individuals, families, and businesses alike. Among its many provisions are the new rules for alimony, which may complicate the divorce process even more.

Alimony Pre-TCJA

Before the TCJA, the payment of alimony typically falls on the higher-earning ex-spouse. The tax would be deductible to him or her and would be taxable income for the receiver. This allows the payor to receive a tax benefit and the lower-earning ex-spouse to pay less taxes and earn more dollars. The deduction on the part of the payor can result in up to 50 percent in tax savings for high earners in high-tax states, like New York and California.

To illustrate, consider an alimony payment worth $50,000. This come down to $20,000 after the tax reductions for the payor. The beneficiary, on the other hand, will only have to pay $10,000 in taxes. This results in a “divorce subsidy” or net savings of $40,000.

This old process sometimes helped prevent the divorce from going to trial, especially when the case has high financial conflicts.

Alimony Post-TCJA

Broken red heart and Divorce paper note on cash

The TCJA reversed these longstanding rules; the payments are no longer deductible for the payor and are not part of the income of the recipient. It took effect on January 1, 2018, but only affected divorces finalized on January 1, 2019 and beyond.

The new rule imposes a heavier tax burden on the spouse paying alimony since the payments are no longer deductible. For example, the alimony is set at $10,000 a month. The payor must pay this amount at his or her tax rate, which can get as high as 37 percent, and the recipient doesn’t have to pay any tax on the alimony. The federal government expects to make $6.9 billion in additional income tax revenue from this tax reform.

Family and divorce attorneys expect that the new alimony tax code will result in messier divorces. Payors may be hesitant to agree to the amount of alimony or may refuse entirely to provide spousal payment because they no longer benefit from it, unlike in the old law.

Divorce in 2019

The TCJA affects another aspect of divorce: child support. Under the old regulations, payment for child support may be included in the alimony amount to allow deductions. But according to the TCJA, there will be no more tax deductions for child support as well. The recipient, either the ex-spouse or the child, doesn’t have to declare the amount as income.

Couples planning to get a divorce but are finding it difficult to navigate the new rules of alimony may consider other payment methods. One alternative is to make a large, one-time payment instead of regular remittances. This arrangement can reduce the need for constant communication between the two parties and eliminate tension, which may appeal to some couples.

Another option is to settle for a non-taxable property settlement, which can occur in a lump sum payout or in the form of assets.

The best way to navigate a divorce, especially under these new regulations, is to seek professional support from a certified divorce financial analyst and your divorce attorney. And try to keep it civil, so you and your ex-spouse can get a clear picture of what you need to live on after your divorce.

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