The family law industry is facing a dramatic change to the tax impact of divorce following the passage of The Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017. Under the new legislation, for divorce decrees executed after December 31, 2018, alimony becomes tax neutral, meaning there are no tax consequences to either party, much like child support. The repeal of the alimony tax deduction does not affect existing alimony obligations or divorces finalized prior to January 1, 2019.
This change in legislation eliminates an income-shifting effect that often results in tax savings to the former family unit, a setup that can reduce the financial burden of spousal support on the paying spouse. In instances where the income is not sufficient to meet the parties’ needs, the new legislation may have more of an impact on the lower income spouse. While the amount of alimony awarded may be less under the new tax neutral treatment, the net income available to meet living expenses may also be lower, as illustrated in Table 1.
The alimony tax deduction has long been used in settlement negotiations to help facilitate an agreement. The repeal of the alimony tax deduction may make settlement negotiations more difficult, as the paying spouse may have less flexibility in creating an agreement regarding alimony. In the absence of the tax deduction, it could become more expensive for the paying spouse and reduce the amount that individual is willing to pay.
The construction of settlement offers may change dramatically under the new law, especially for wealthier clients. There may be a new incentive to structure offers with an unequal distribution of assets in exchange for reducing or eliminating alimony.
Under the new law, it appears that the logical result from this change would be the elimination of alimony recapture for alimony originating under the new law, as the concern for disguising equitable distribution payments as alimony is diminished in the absence of the alimony tax deduction.
Divorcing spouses often agree to stay married through the end of the year to take advantage of filing a joint income tax return. In 2018, this option may require much more consideration than in the past. The new legislation could also result in an influx of divorce cases this year, as it applies to alimony obligations that arise from court orders and decrees executed after December 31, 2018.
The repeal of the alimony tax deduction is just one of several changes in legislation that can impact family law matters. Although we don’t know all of the implications this legislation will have, we do know that the future of tax-related issues in divorce will be a hot topic.
For more information on how the Tax Cuts and Jobs Act of 2017 may impact your clients, consult a forensic CPA and/or tax professional.
Amanda M. Porupski, CPA
CBIZ MHM – Forensic & Financial Services