Q: How will the new alimony tax laws impact my divorce?
If you are considering getting divorced in Arizona or anywhere else, or are already in the process of doing so, there’s another thing for couples to disagree about just around the corner.
A new federal tax law is hitting the books on January 1,
The New Tax Cuts and Jobs Act (“TCJA”) is going to eliminate income tax deductions for alimony payments in post-2018 divorce or separation agreements.
Under the current federal tax laws, the spouse required to pay alimony receives a tax deduction on their income taxes while the spouse receiving the alimony payment must pay income tax on it. But for agreements executed after December 31, 2018, the payer of alimony loses the income tax deduction and the recipient of alimony will no longer have to include alimony payments in their taxable income.
Critics of the change argue that payers will fight to pay lower alimony payments to offset the loss of the tax deduction. But the change was necessary because the government could not reconcile the differences in the higher numbers of payers claiming income tax deductions and the lower numbers of recipients paying income tax on those alimony payments.
It’s important to note that existing divorce and separation agreements regarding alimony payments – – as well as those entered on or before December 31, 2018– will not be subject to the new tax law.
Understandably, those expecting to pay alimony will be rushing to finalize their agreements before the year-end, while spouses expecting to receive alimony may be putting on the brakes.
While the above explanation is rather simple, the tax laws impacting divorcing couples are actually very complicated. That’s why it’s important to consult a skilled family law attorney with a strong tax law background.
For example, there are multiple requirements which must be met in order for alimony payments in existing or pre-2019 divorce agreements to qualify as “tax deductible alimony payments” in the Internal Revenue Code regulations. These include:
payments must be mandated under a written instrument or agreement
payments must be made to or on behalf of a spouse or ex-spouse
payments cannot be stipulated to “not be alimony” and must be made in cash or cash equivalent
ex-spouses must live in separate households and not file joint tax returns
payments cannot be child support
the obligation to pay must end upon the recipient’s death
the payer’s income tax return must include the recipient’s Social Security number.
If you are considering a divorce, or have any questions regarding alimony or spousal support or how the new tax laws may affect you, Cohen Family Law can help. Contact us today to schedule a free consultation.
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