The new year has brought many changes — including the start of new tax laws. One specific area to pay close attention to: the change to rules regarding tax obligations and alimony payments.
Tax law and alimony: Deduction lost
Previous tax law allowed the individual making the alimony payment to claim a tax deduction. In return, the individual receiving the payment would include the funds as taxable income on his or her tax returns. This resulted in a lower tax rate on the funds as the individual receiving the alimony payment was generally in a lower tax bracket.
The deduction served as a negotiating tool. The individual requesting alimony could point to the deduction as a means to justify a larger award. This tool is no longer available.
The Tax Cuts and Jobs Act (TCJA) passed at the end of 2017 removed the provision within the U.S. tax code that allowed for this deduction. As a result, alimony payments are no longer deductible and those going through a divorce will need to reevaluate how they negotiate alimony payments.
Impact of change: Reach beyond those currently going through divorce
The implications of this change extend beyond current divorce negotiations. Those who have negotiated a prenuptial or postnuptial agreement may have put together the agreement based on the belief alimony payments would be deductible in the event of a divorce. As this is no longer the case, it is wise for those with prenup and postnup agreements to revisit these documents and make adjustments to reflect the new law.
The impact can also extend to those who have already finalized their divorce but are moving forward with a modification. Depending on how the changes are executed, the modification could result in application of the new law.