Financial negotiations in a divorce often include alimony. The Tax Cuts and Job Act of 2017 made significant changes to the tax treatment of alimony. These changes will impact the way alimony is negotiated.
Existing agreements are still subject to the old laws which also remain in effect for divorce and separation agreements executed during 2018. Beginning with agreements executed in 2019, the new rules will be in place.
Under the old rules, alimony payments were tax deductible and reduced the adjusted gross income of the spouse/former spouse making the payments. The recipient of the alimony payments was required to report the payments as taxable income.
The new rules reverse the previous rules. There will no longer be a deduction for the payment of alimony and the recipient will no longer include the payments received in taxable income. It is important to note that for state tax purposes, not all states have alimony laws that will conform to the new federal rule.
Although taxes shouldn’t dominate divorce and separation proceedings, it is important not to ignore the tax implications. The 2017 tax law also made changes in other provisions that have historically been negotiated in divorce proceedings. For example, personal and dependent exemptions have been eliminated and the standard deduction and child tax credits have both been dramatically increased.
If you are in a divorce situation, our office can help decipher the various tax implications. Contact us to discuss your situation.
To read more about The Tax Cuts and Jobs Act of 2017 read 2017 Individual Income Tax Reform.