Think you might get a break on your taxes when it comes paying alimony under Trump’s new tax law? In reality, one party in a divorce is poised to enjoy a windfall while the other will lose a valuable tax deduction. For a president who’s been married three times and divorced twice, this tax plan seems to promote prenup agreements (though these may need to be revisited and possible recalculated too) and lump-sum divorce payouts to avoid the tax implications that will apply to alimony in 2019.
Alimony under the new tax plan
Under the old tax law, the party who pays alimony can claim the payment as a deduction on their federal income tax (whether they itemize or not), while the party receiving the alimony must report it as income on their taxes. Under the new law, for divorce settlements reached after December 31, 2018, alimony payments will no longer be deductible by the payer, nor will they be taxed as income to the recipient. Which means recipients gain tax-free income while payers lose a tax deduction. Did you notice that December 31, 2018 date in the preceding paragraph? It’s important, because while most of the changes in the new tax law took effect as of January 1, 2018, the alimony provisions won’t kick in for another year, affecting divorce settlements entered into on or after January 1, 2019. There are, however, some facts you need to know now, courtesy of Kristin M. Lis, a divorce attorney with Smedley & Lis in Woodbury, New Jersey.
- If your alimony agreement predates 2019, the old tax treatment remains in effect. Alimony payments will remain deductible to the payer and included in the income of the recipient. The new tax law will be effective for agreements entered into on or after January 1, 2019.
- However, if you want to change the alimony you already pay, you will be affected. If a pre-2019 divorce and alimony agreement is modified after January 1, 2019, the payor would no longer be able to deduct the alimony payments from their taxes, and the recipient would not be obligated to declare the alimony as income and therefore would not be required to pay taxes on it.
- There will be room for shady dealings. There may be an uptick in motions to modify alimony payments in 2019, as many recipients may try to work the system to their benefit (or just irritate their ex-spouse). Even reducing the award minimally will benefit the recipient because the support will no longer be taxable, meaning more money stays in the recipient’s pocket instead of going to the government. For divorce attorneys, 2019 could be a very busy year.
- More money, less problems – for one party. Because alimony will no longer be considered “income,” some recipients may qualify for income-based health coverage subsidies or for state and federal assistance programs. Consider that someone receiving $300 a week in alimony under the new law will get $15,600 in tax-free money annually. That creates a disproportionate benefit for the recipient and a detriment to the payer, who must shell out the money with no tax benefit.
How these changes to taxable alimony play out will absolutely affect post-2018 divorce settlements and modifications. The potential payer of alimony may fight to pay less of the now nondeductible expense, arguing that the recipient is getting a tax-free windfall. Whether the potential recipient will buy that argument is questionable – divorces tend to be contentious, after all.