The Tax Cuts and Jobs Act passed by President Trump in 2017 came into effect on January 1, 2019. These adjustments mean huge changes for couples involved in a divorce where alimony is a factor. Alimony has always been a difficult component in the divorce process. The new changes give both partners a reason to fight harder for their side of the equation.
Identifying the Changes
In the past, alimony payments were tax deductible for the spouse making the payments. This cut provided the possibility of saving thousands of dollars at tax time each year. In the past, the spouse receiving payment claimed alimony as taxable income. The new laws reverse the situation entirely. Now, alimony payments are not tax deductible. However, the spouse receiving payment will be receiving non-taxable income. The immediate conclusion is that the new laws directly benefit the spouse receiving payment (often women in the past, but this is shifting). However, a deeper inspection reveals threats for both sides.
Who is Affected?
In short, everyone is affected. Both spouses will be heavily impacted, and it is unclear whether anyone will benefit. The systems used to calculate alimony will have to change to accommodate the differences as well. Predictions for 2019 anticipate divorces to be messier and more difficult than ever before.
The bottom line is, without the tax break there will simply be less money to go around. The spouse paying alimony is typically in a much higher tax bracket than the receiving spouse. In the past, the receiving spouse may have been collected a substantial enough payment to afford the taxes. With the new laws, alimony payments will be calculated differently, most likely resulting in lower payments. Additionally, non-taxable income cannot be invested in the same way. Since alimony payments are no longer considered taxable earned income, they cannot be deposited in an individual retirement account (IRA).
As the new laws are tested, the negotiations surrounding alimony and other forms of agreeable payments are expected to change. If you are seeking a divorce, getting help from an experienced attorney is more important than ever. Contact us at Hais, Hais & Goldberger to see how the new alimony laws can affect your pending divorce.