At the end of 2017, President Trump signed the Tax Cuts & Jobs Act (TCJA) into law. The bill ushers in some sweeping changes to existing tax law, but there are a few significant changes that can directly affect divorcing couples.
One of these changes has to do with spousal support, or alimony, and it’s something all married couples should consider when they’re either divorcing or drafting a pre- or post-nuptial agreement.
The alimony tax deduction
Alimony is awarded in a divorce agreement when there’s a disparity in income between each spouse. Judges typically consider alimony when one spouse earns significantly less than the other, understanding that two separate families can’t live as inexpensively as one.
Before the new tax law, which affects divorces carried out after December 31, 2018, ex-spouses who paid alimony were able to deduct that expense from their federal taxes. And, ex-spouses who received alimony had to claim that alimony on their federal taxes as income. In 2015, approximately 600,000 taxpayers claimed around $12 billion in tax breaks – but under this new tax law, both the deductions and taxations will be eliminated.
Note that these changes only affect divorces finalized after December 31, which means that any existing divorce judgments will be grandfathered in under the previous tax law. Generally, anything taxable and deductible before will remain so.
What are the real-life implications? It’s difficult to predict who will benefit from these changes, as everyone’s situation and circumstances are different, and judges may use their discretion on awarding spousal support. However, here’s what experts are saying.
Under the previous tax plan, where alimony was tax-deductible, spouses were more amenable to larger alimony payments (since they could be written off). However, now that alimony isn’t tax-deductible, spouses may fight for lower payments, as their ability to pay may be more limited. And that means less money for the spouse that needs it.
Couples planning on marrying should also keep this tax law in mind when planning pre- and post-nuptial agreements.
The family law attorneys at Taylor Jones Taylor are here to answer any questions you have about the divorce process. We will ensure your rights are protected and that you are represented fairly. To schedule a consultation, call 662.253.5193 or fill out our contact form to learn more. We have offices in the Southaven, Olive Branch, and Hernando areas.