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Tax cut act switches alimony tax burden in 2019

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By Reeves Mahoney
Apr 6, 2018

Have you been putting off finalizing your divorce? Well, you might want to sign on the dotted line by year’s end, or at least get a legal separation agreement in place.

The Tax Cuts and Jobs Act passed by Congress and signed into law by President Trump this past December wipes out a 75-year-old tax deduction dealing with alimony payments, starting Jan. 1, 2019.

For those who have been paying alimony — a husband’s or wife’s court-ordered payment for a spouse pursuant to a separation agreement or a divorce — don’t worry. This law won’t affect you. You can continue to deduct your alimony payments from your annual taxes, and, the recipient spouse must still claim the payments as income.

For those in the divorce process this year, the good news is the “old tax rule” of deductibility still applies until the deadline of Dec. 31, 2018.

The “new tax rule” applies to those who get divorced or reach signed separation agreements in 2019. The spouse paying alimony will no longer be able to deduct the support from his or her gross income in arriving at a taxable income. For the alimony recipient, the payments will be tax-free.

Typically, the spouse receiving alimony has less income than the one paying, putting that person in a lower tax bracket. Starting in 2019, the change in the tax law shifts the tax burden to the higher earner. So, unless you already have a divorce decree or a comprehensive separation agreement by Dec. 31, you’ll have to adhere to the Tax Cuts and Jobs Act change.

Congressional tax writers are contending the change is equitable for married people. It’ll also add about $6.9 billion in tax revenue to federal coffers in the next decade, according to the IRS.

But, divorce lawyers such as myself forecast the change will have far-reaching ramifications.

By example, it will make separation negotiations harder because the spouse with the alimony obligation will be motivated to pay less to offset the new, increased tax burden.

It will likely make divorces drag on longer and become more expensive, especially for couples who don’t have a lot of money to haggle over.

Having specialized in divorce for 39 years, I know the financial interlocking hydraulic properties of alimony, child support and equitable distribution (division of assets – especially in settlement negotiations). I predict the implementation of this new law in 2019 will, unfortunately, result in increased divorce litigation.

How many people will be affected by the change? IRS numbers show that in 2015, about 600,000 Americans claimed an alimony deduction.

Bottom line: A divorce with an alimony component in 2018 will be easier to resolve than with the new tax law in 2019 – the outgoing tax law leaves more money to go around.

Reeves Mahoney is a founding partner of the family law firm Mahoney Richmond Thurston PLLC in Virginia Beach. Reach him at r.mahoney@mrt.law.