HCBA Lawyer Magazine Vol. 28, No. 4 | Page 32

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