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Changes in the tax code could affect alimony negotiations

Alimony has been a tax-deductible expense for those who pay it and taxable income for those who receive it since 1942, but these rules will not apply to divorce agreements executed starting in 2019. Under the provisions of the Tax Cuts and Jobs Act, spouses who pay alimony will not be able to deduct these payments on their personal tax returns and spouses who receive it will not be required to pay tax on this income. Divorced couples with agreements already in place will not be affected by the new law.

People who pay alimony generally earn more and pay higher rates of income tax than those who receive it, which means that the changes going into effect in 2019 will usually result in less after-tax income being available for it. Alimony has almost always been paid in money because payments made in other forms are not deductible under the current tax code, but the changes introduced by the law could lead to far more creative alimony negotiations in the future.

Losing the alimony tax deduction could prompt people to eschew long-term payment plans and opt for large upfront payments instead. Such one-time payments could be made with stock or the funds from retirement accounts as well as cash. Using retirement funds for these purposes could also benefit people who would normally receive monthly alimony payments. This is because more money may be available during negotiations because property settlements are not subject to tax.

Experienced family law attorneys may pay close attention to how changes in federal tax laws could impact divorce negotiations. Attorneys could also recommend revisiting post-nuptial agreements when tax laws change to ensure that provisions dealing with spousal support or other issues have not been rendered unenforceable.

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