Figuring out how alimony will be awarded has always been a difficult task for divorce lawyers. With the new changes to the tax code, alimony determinations will now be even more difficult for divorced couples.
In the past, the trouble with determining alimony was usually caused because each state has its own criteria for the amount and length of time that alimony payments should be allocated. According to Mary Kay Kisthardt, a professor at the University of Missouri-Kansas City School of Law, “There's not really a cohesive rationale for alimony. In any given state, we're not sure what we're trying to do."
Although alimony determinations were still difficult in the past 75 years, one rule remained consistent: Alimony is deductible for the payer, and the recipient can pay income tax on alimony.
What Are The New Changes?
However, the new changes to the tax code will put a stop to this consistency. Under the Tax Cuts and Jobs Act, divorces that have been finalized after Dec. 31, 2018, won’t be able to deduct alimony for the payer spouse. In addition to this change, taxes will no longer have to be paid on alimony by the recipient spouse.
Many lawyers across the country are now anticipating that divorce cases will become messier with the new tax code changes. Talking about these new changes, Tom Leustek, founder of advocacy group New Jersey Alimony Reform, says, “The two households created by a divorce simply cannot function as cheaply as the single household of an intact family. The present tax structure that helps ameliorate those burdens has now been eliminated."
Under the previous tax code, a household's income was given tax relief in a divorce because the higher-paid spouse is transferring income to the lower-paid spouse. Without the tax benefit, divorce will now be less affordable for many couples. These financial implications might force some couples to remain together in an unhappy marriage.
Other changes that divorced couples need to keep in mind include:
- The Personal Exemption: This was reduced to $0 for all taxpayers this year but can possibly return as a $4,000 exemption in 2026, unless the laws change again.
- State & Local Taxes: Deductions for state income and property taxes exceeding a combined amount of $10,000 have been eliminated. This change will result in fewer taxpayers being subjected to the AMT.
- Moving Expenses: Unless one of the spouses getting divorced is a member of the Armed Forces, expenses incurred from separating the marital household can no longer be deducted.
- Legal & Professional Service Fees: Deductions for tax preparation, investment advisory fees, and the legal fees incurred for tax planning and to obtain taxable alimony have been taken away.
Changes to estate values that will be subject to inheritance taxes can also indirectly affect high-net-worth divorce negotiations because the need for advance estate planning vehicles such as Life Insurance Trusts and Grantor Retained Annuity Trusts (GRATs) have been reduced.
Keeping the Marital Home Will Be More Expensive
The combination of new limits under the tax changes will make it harder to keep the marital home. With alimony and unallocated support payments no longer being considered taxable income, mortgage companies will be adapting their qualification process. You can now deduct the mortgage interest paid on up to $750,000 of debt on first and second homes combined, though taxpayers who have existing mortgages on first and second homes with a total debt of $1 million are grandfathered for interest deductions at a higher level. Adding all this to the inability to deduct interest paid on home equity loans, there is a lot that needs to be considered if you want to keep the marital home.
Lump-Sum Property Settlements
Without the deductions for alimony and unallocated support, it is possible there will be a substantial increase of lump-sum property settlements in high-net-worth cases. Splitting the marital assets and walking away cleanly might now be a more attractive option to both sides. Without the tax incentives to provide spousal support income, more couples will probably explore lump-sum property settlements more often.
Do I Need to Modify My Existing Alimony Agreement to Fit the New Tax Code?
These new tax code changes have many people wondering whether they should change their existing agreements to fit the new code, this way they won’t have to pay taxes on alimony any longer. However, some tax experts say that it still isn’t clear if agreements modified in 2019 would still be subject to the new tax rules. Either way, because the paying spouse will now have less money to pay from without the old deduction, the new tax code changes will bring in less money for the recipient spouse.
Are you worried about how the new tax code will affect your divorce agreement? Contact our Hamden team of divorce attorneys to find out how we can assist you.