On December 22, 2017, Congress approved the Tax Cuts and Jobs Act (TCJA), that made significant changes to the Internal Revenue Code that will affect alimony or spousal support going forward. If your divorce is already final you should not be concerned. If you are contemplating divorce or currently in the middle of a divorce, and are concerned about paying alimony or spousal support, you should consider how the change in the tax code may affect your taxable income.
Under the outgoing version of I.R.C. § 215 a taxpayer was able to deduct “alimony or separate maintenance payments” from gross income. The new tax law repealed this deduction for any divorce judgment or separation agreement executed after December 31, 2018. This will not affect modifications of older judgments. The repeal of the deduction will not apply to any divorce or separation agreement executed on or before December 31, 2018, and modified after that date unless the modification expressly indicates it is subject to the new rule.
If you became divorced prior to the this change in the law, the tax deductibility of your alimony will not be affected, and you may modify the payment amount or duration. If you or your spouse file for divorce or if your divorce is filed and finalized prior to January 1, 2019, the old rule still applies. If you are divorced after January 1, 2019, alimony, spousal support or separate maintenance payments will remain taxable income for the paying party and will be a non-taxable support payment to the recipient.
Often the spouse who pays alimony or spousal support is in a higher tax bracket. The spouse that pays the support will no longer benefit from the tax deduction and will have to pay taxes on income used to make alimony or spousal support payments. The party that receives the alimony or spousal support will not have to pay taxes on these payments. This means there will be potentially less net income available to you, your former partner, or your children. This loss may evidentially be mitigated by a future Court decision or the state legislature in Boston, but no change has occurred yet.
If you are planning or in process of a divorce, based on recent changes in tax law, it is in your financial interest to determine the advantage of finalizing the divorce before or after the end of calendar year 2018. The tax treatment of alimony and spousal support payments may differ substantially for those divorced before or after the end of the year. If you wish to learn more, please call me at 617-431-8071 to schedule a consultation.
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