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How the 2019 Tax Law Impacts Divorce

Alimony will no longer be tax-deductible to the paying spouse and taxable as income to the receiving spouse.

The current tax implications of alimony have been in place since 1942, but as of the beginning of 2019 those tax implications will drastically change. As of January 1, 2019, alimony is no longer tax-deductible to the payor and taxable as income to the spouse receiving alimony. Section 11051 of TCJA states, “this section repeals the deduction for alimony or separate maintenance payments from the payor spouse and the corresponding inclusion of the payments in the gross income of the recipient spouse.” Under the new tax code, there are no tax implications regarding alimony meaning that all alimony obligations are now paid with after-tax dollars. In short, alimony is no longer an off-the-top deduction for the party that is paying it and no longer claimed as income to the spouse receiving it. It is important to remember that the tax implications are not retroactive meaning that if your divorce was finalized prior to January 1, 2019, you still maintain your tax-deductible status. The new tax implications only impact those individuals whose divorces are finalized after December 31, 2018. This means that any formulas or calculations previously used to estimate alimony must also be recalculated to contemplate the new alimony tax implications.

How will the 2019 tax law impact those going through divorce after 2019?

The new changes to the tax code will hurt both parties as the spouse paying alimony will be pushed into a higher tax bracket and, in turn, the amount of available funds to pay alimony will be reduced. With less funds available, now that after-tax dollars are being utilized, it reduces the paying spouse’s ability to pay, which in turn reduces the bargaining power of the spouse requesting alimony. Given the loss of the tax deduction, the amount of alimony offered in mediation or settlement negotiations will most likely decrease, which could lead to increase in alimony litigation. The new tax law is projected to raise $6.9 billion dollars for the IRS over the next ten years. While this will certainly benefit the federal government, it will most likely not benefit parties that are divorcing after December 31, 2018.

How will the 2019 tax law impact those already divorced are grandfathered in under the old tax code.

If you were divorced prior to January 1, 2019, the new tax laws do not impact your divorce decree and you do not lose the tax-deductible status for the payor. Additionally, the spouse receiving alimony must still claim the alimony as income for tax purposes. The new tax laws do not have a retroactive effect meaning that they do not impact those who were previously divorced.

How do the tax implications impact alimony modification cases?

Pursuant to the new tax code, the new alimony provisions shall apply to: (1) any divorce or separation instrument after Dec. 31, 2018, and (2) any divorce or separation instrument executed on or before such date and modified after such date, if the modification expressly provides that the amendments made by this section apply to such modification. While there is still some confusion on this topic, the majority of CPAs are advising that modifying alimony in a subsequent modification action does not impact the tax implications, unless the Final Judgment or agreement specifically changes the wording to remove the tax deduction. In other words, if the agreement or Final Judgment is silent on the tax deduction, it retains its pre-2019 tax code status. It is only when you explicitly add language to remove or alter the tax implications that it would be subject to the new tax code.

Click to Calculate Estimated Alimony Payments for Florida

Prenuptial and Postnuptial agreements may be impacted by the 2019 tax law changes.

If you have an existing prenuptial or postnuptial agreement that provides for a specific alimony amount, the agreement may need to be reviewed. Previously when calculating alimony for prenuptial or postnuptial agreements it was presumed that the alimony would be tax deductible to the payor and taxable as income to the spouse receiving alimony. Now that the tax code has changed, prenuptial and postnuptial agreement should be revisited, so that these provisions can be amended to properly consider the current tax code. It is a good idea to have an attorney review the prenuptial or postnuptial agreement prior to things becoming contentious, so that the attorney can properly advise as to whether an amendment may be necessary.

Changes to the child tax credit from the 2019 tax law

The changes to the tax code also impact the child tax credit. The income limits for the tax credit have increased, which means that the credit will start to phase out at $200,000 for an individual or $400,000 for married couples filing jointly, which is a substantial increase from the previous $75,000 for individuals or $110,000 for married couples under the prior tax code. Additionally, the tax credit increased from $1,000 per child to $2,000 per child as long as the child is 17 or younger at the end of the tax year. However, the $4,050 exemption for each dependent under the prior tax code was eliminated through the year 2025. The big difference here is that the child tax credit reduces your tax bill dollar-for-dollar, while the tax exemption reduced your taxable income. The child tax credit is also refundable, which means that if the child tax credit brings your tax liability below zero, the IRS will refund you back up to $1,400 of the child tax credit for each qualifying child. This is also a change from previous years as the child tax credit was previously non-refundable under the prior tax code.

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