For years, those who paid alimony could deduct the payments from their income taxes, and the payments were taxable income to the spouse who received the alimony. This situation changed when President Trump signed The Tax Cuts and Jobs Act on December 22, 2017. People who are getting divorced or contemplating divorce should understand how the new law works, so they can avoid costly mistakes.
While this new tax law applies to separation and alimony agreements signed after December 31, 2018, a divorce decree does not have to be finalized before the end of 2018 in order to avoid these new tax consequences. But, under separation agreements signed on or after January 1, 2019, alimony will not be tax deductible to the payer, and the spouse who receives alimony does not have to report it as taxable income.
This change will usually operate to increase taxes and decrease total family funds. Under the rules that apply until the end of 2018, the payer usually makes more income, and gets taxed at a higher rate than the spouse receiving the alimony, who would get taxed at a lower rate. As a result, alimony payments often transferred income to the spouse with the lower tax rate, resulting in a net savings to the family’s total tax bill. But this tax advantage will no longer be available to spouses who want to maximize the income kept in the family.
This change has practical consequences. Spouses who are divorcing or contemplating divorce may want to finalize their separation agreements before the end of 2018. While months remain in 2018 to finalize a separation agreement, it often takes more time than spouses realize to reach such an agreement, and time is running out.
Important questions remain unanswered. For example, while existing separation and alimony agreements will remain unaffected by the rule, because they are “grandfathered in” before the new law takes effect, it remains to be seen whether the I.R.S. and courts will seek to apply the new rule after these agreements have been modified due a material change in the ex-spouses’ financial circumstances. Also, it also seems unlikely that alimony trusts will be grandfathered in under the new law, so grantor spouses may well have to pay the tax on trust income.
This article addresses only some of the consequences of the new tax law. Our next post will discuss how the 2017 law affects itemized deductions, and changes the way divorcing spouses should allocate personal exemptions and the Child Tax Credit.
Tax laws will probably change again. If you are considering an alimony agreement in Massachusetts that survives the final divorce decree, seek legal counsel so that you can keep the ability to modify these agreements if tax laws change again in unpredictable ways.
We here at Badger Law are here to help you sort out these and other complicated issues of divorce law. We are centrally located in Boston’s financial district, and we have over twenty years of experience helping clients untangle the complexities of alimony and property division. We want to simplify the divorce process, and make it less stressful for you. Call us today at 617.963.3599 or click on this link to schedule a free initial consultation.