the eliMination of the aliMony taX deduCtion
Marital & Family law Section
Chair: Amber Boles – Law Office of Amber Boles, P.A.
TABLE 1* - SummARy oF monThLy ALImony
T
he family law industry
is facing a dramatic
change to the tax
consequences of divorce
following the passage of The Tax
Cuts and Jobs Act of 2017, signed
into law on December 22, 2017.
Under the new legislation, which
applies to divorce decrees executed
after December 31, 2018, alimony
becomes tax neutral, meaning there
are no tax conse quences to either
party, much like child support. The
repeal of the alimony tax deduction
does not affect existing alimony
obligations or divorces finalized
before January 1, 2019.
This change in legislation
eliminates an income-shifting effect
that often results in tax savings to
the former family unit, a setup that
can reduce the financial burden
of spousal support on the paying
spouse. In instances where the
income is not sufficient to meet the
parties’ needs, the new legislation
may have more of an impact on
the lower-income spouse. While the
amount of alimony awarded may
be less under the new tax neutral
treatment, the net income available
to meet living expenses may also
be lower, as illustrated in Table 1.
Settlement negotiations
The alimony tax deduction
has long been used in settlement
negotiations to help facilitate an
agreement. The repeal of the
30
Gross Income Payor
$25,000 Payee
$4,167
alimony
Taxable Income (6,250)
$18,750 6,250
$10,417
Tax
Net Monthly (6,563)
$12,187 (2,292)
$8,125
AFTER §1309 REPEAL
Gross Income =
Taxable Income
Tax
alimony
Net Monthly
Payor
$25,000 Payee
$4,167
(8,750)
$16,250 (917)
$3,250
(4,875)
$11,375 4,875
$8,125
Pending Cases
alimony tax
the repeal of
Divorcing spouses
deduction may
often agree to stay
make settlement
the alimony tax
married through the
negotiations more
deduction is just
end of the year to take
difficult, as the
advantage of filing a
paying spouse may
one of several
joint income tax return.
have less flexibility
changes in
In 2018, this option
in creating an
may require much more
agreement
legislation that
consideration than in the
regarding alimony.
can impact family
past. The new legislation
In the absence of
law matters.
could also result in an
the tax deduction, it
influx of divorce cases
could become more
this year, as it applies
expensive for the
to alimony obligations that arise
paying spouse and reduce the
from court orders and agreements
amount that individual is willing
made after December 31, 2018.
to pay.
The repeal of the alimony tax
deduction is just one of several
Equitable Distribution
changes in legislation that can
The construction of settlement
impact family law matters. Although
offers may change dramatically
we don’t know all the implications
under the new law, especially for
this legislation will have, we do
wealthier clients. There may be
know that the future of tax-related
a new incentive to structure offers
issues in divorce will be a hot topic.
with an unequal distribution of
For more information on how
assets in exchange for reducing
the Tax Cuts and Jobs Act of 2017
or eliminating alimony.
may impact your clients, consult a
forensic CPA
Alimony Recapture
and/or tax
Under the new law, it appears
professional.
that the logical result from this
change would be the elimination
of alimony recapture for alimony
Author:
originating under the new law,
Amanda M.
because the concern for disguising
Porupski, CPA -
equitable distribution payments as
CBIZ MHM –
alimony is diminished in the absence
Forensic &
of the alimony tax deduction.
Financial Services
MAR - APR 2018
|
HCBA LAWYER
PRIOR TO §1309 REPEAL