Effect of Tax Cuts and Jobs Act on Family Law and Divorce Cases
The federal tax reform law, known as the Tax Cuts and Jobs Act (TCJA), which was signed into law by President Trump last year, is a major piece of legislation hundreds of pages long. As a result, it is easy to overlook some changes brought about by the law that could nonetheless have a huge impact on many families. A case in point is the way divorcing couples will be taxed beginning in 2019. The tax reform law shifts the alimony tax burden away from the recipient and onto the payor.
Shifting the Tax Burden
For more than 75 years, those who pay alimony have been able to deduct their alimony payments on their taxes. On the other hand, recipients of alimony have been required to declare the alimony payments they receive as taxable income.
TCJA completely changes this situation, however. For divorces that are filed or modified after December 31, 2018, those who receive alimony will no longer have to declare their payments as income, while those who pay alimony will no longer be able to deduct those payments. In effect, this means that the alimony tax burden shifts from the recipient to the payor. The changes only apply to divorces, separations, or modifications that are filed on January 1, 2019 and later. Divorces from before then will still be treated according to the old tax rules, unless they are modified on or after that date.
It’s not a Tax Break for Recipients
On the surface, the change looks like a tax break for alimony recipients, since the alimony they receive will now be tax-free. However, in effect the changes will likely squeeze both payors and recipients financially. Because payors are usually in a higher income tax bracket, the amount they are able to deduct on their alimony payments is usually larger than what recipients currently pay in taxes on that alimony. That means that payors will simply have less room to negotiate higher alimony payments, which in turn will mean less money for recipients.
Another complicating factor is the fact that many states have alimony guidelines that are built around federal tax law. Once those guidelines are updated, the effect will be lower overall alimony payments to reflect the fact that the deduction is no longer available for payors. Therefore, in effect the shifting of the tax burden from the recipient to the payor simply means a greater share of money that would otherwise have gone to alimony payments will instead go to taxes.
Maryland Family Law & Divorce Lawyer
You should discuss your case with an experienced Maryland divorce lawyer to determine the effects of the new tax law on your alimony or anticipated alimony. You may be able to receive tax benefits depending on whether your obligation is created before January 1, 2019 and whether by a separation agreement or a divorce judgment. The tax law also may affect modification of existing alimony depending on the date of modification. Feel free to call my office (301-309-9002) or email me (firstname.lastname@example.org) for an appointment regarding all of your family law issues.