Alimony payments and new tax laws, part of the Tax Cuts and Jobs Act of 2017, make radical changes in how alimony income and deductions are handled. The bill summary reminds us that as the law stood before January 2018, a couple may be “divorcing” as part of their strategy to pay fewer taxes. The ‘pro-family’ provisions in the proposed law effectively put an end to the ‘divorce subsidy,’ allowing the IRS to collect more than $8 billion in new revenue over 10 years.
The provision would eliminate what is effectively a ‘divorce subsidy’ under current law, in that a divorced couple can often achieve a better tax result for payments between them than a married couple can. Bill summary quote
Upon closer review, one might see this as just another cash cow in the large herd needed to balance the scale against corporate tax breaks on one side and tax benefits to those with less taxable income on the other.
Alimony payments and tax laws during 2018
Through 2018 tax laws regarding alimony payments are unchanged. This means amounts paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) may be alimony for federal tax purposes. Generally, the one paying alimony is allowed a tax deduction for alimony paid, and the one receiving alimony includes the payment amount as income and taxed accordingly. As something of a benefit to having alimony included as income, the recipient of alimony payments has been allowed to consider this as income for IRA contribution purposes. During 2018, a settlement involving payment meeting the definition of alimony is a contract made under the ‘old’ tax laws.
Alimony payments and new laws after December 31, 2018
The Tax Cuts and Jobs Act of 2017 changes the financial outcome and negotiating tactics of divorce and other settlement agreements involving payments considered to be alimony. Here are the more obvious changes and along with some more subtle consequences:
- The individual making alimony payments will no longer be allowed to claim alimony payments as a tax deduction to the IRS.
- The recipients of alimony will no longer include these amounts in their gross income which, on the surface appears to be a benefit. However, the recipient’s tax base will be figured at the rate paid by the person paying the alimony. Most alimony is paid by the man who will normally have a higher income and tax rate than the woman. This arrangement generally means more federal taxes collected from both sides.
- There is another difficulty for the party receiving alimony payments through these divorce and separation agreements. These payments are no longer considered compensation income, and cannot be considered for IRA contribution purposes.
- States that impose an income tax will very likely follow the IRS if they are an alimony state. Some states may, at this time, indicate that the receiver of alimony payments will no longer pay taxes on that income, and any payments of alimony and separate maintenance received per court order are taxable gross income. Time will tell regarding final state laws.
- Divorce lawyers are busy and it’s only going to get more difficult for attorneys, court dockets, and other involved parties to meet the December 31, 2018 deadline for a signed contract. The process is also going to become much more expensive than may have been anticipated.
Other issues involving alimony payments?
The general opinion among many divorce lawyers and financial and CPA tax specialists is that divorces are going to become more difficult and require more financial and strategic tax planning. If you’re not well into finalizing an impending divorce or separation, there may not even be enough time left in 2018 to have a signed decree by December 31, 2018. Attorney’s schedules and court dockets are going to be full, and there will be more fighting, contesting and negotiating. If it’s not a done deal in 2018, the price tag for attorney’s fees, financial, tax and accounting expenses and court costs could skyrocket. The cost that could last almost indefinitely would be felt in tens of thousands of additional federal income tax liabilities to both parties.
If a divorce or other separation is inevitable, the general consensus is to get it done in 2018.
The Tax Cuts and Jobs Act of 2017 includes a multitude of changes that will have overwhelming effects on individual federal and state income tax planning and strategies. There are over 500 pages in the new tax law that detail how revenue will be obtained to make up for tax reductions for corporations and lower income groups. The change in taxing of alimony payments for both the payer and receiver are cash cows expected to bring in $8 billion in the next 10 years and are among a minority of changes that are not set to end or be reviewed in 2025.
What’s the bottom line?
If you have never consulted with a CPA tax specialist, and are facing the challenge of a divorce, separation or alimony settlement, contact me. During this difficult time, you need the best CPA tax and financial specialist available. Contact me now. Tax laws and opportunities have changed dramatically and will continue to do so. Stay prepared, flexible and in control.
Our goal is to become part of your overall life goal planning team so that you will be able to establish your own goals and know that you have a trusted professional on your team. We establish and maintain a personal and business relationship with our clients. Your LIFE is your business and your BUSINESS is your life, and we’re here for YOU.
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