The “Tax Cuts and Jobs Act,” signed by the President as law on December 22, 2017, creates various widespread changes to the tax code, and significantly changes how alimony will be treated for tax purposes. Under the prior tax code and for several decades, alimony was tax-deductible by the ex-spouse who paid it and was counted as taxable income to the ex-spouse who received it. In lay terms, this meant the person paying the alimony was not paying income tax on the income that was shifted to his or her former spouse and the former spouse who received the alimony support was responsible to pay the tax on the income.
From a legal prospective, this helped maximize the total amount of net disposable income for a family transitioning to two households, by shifting the tax burden to the person with lessor income, who thereby presumably payed a lessor tax rate. It also shifted to tax burden to the person who had actual use of the income. This had the tendency to feel “fair” to the divorced couple. However, opponents to the prior rule argued that a divorced couple could potentially pay less tax than a married couple, with the same amount of joint income.
Under the new tax code, the payors ability to deduct alimony is completely eliminated, which means he or she will pay tax on that income, even though it is transferred to an ex-spouse. Likewise, the payee will receive the funds, but not be required to report the alimony payments as income. This may seem unfair to the person paying the alimony or as being more beneficial to the one receiving, but the overall result finds both people with less income to support two households in transition.
The bit of good news is that the prior tax code alimony rules are grandfathered through December 31, 2018. Thus, if you already have a Court Order or Property Settlement Agreement which provides for alimony, or you obtain a Court Order or Agreement on or before December 31, 2018, the alimony remains tax deductible to the payor and taxable income to the payee. If your Court Order or Agreement is effective after December 31, 2018, the new rule will apply. The new rule also applies if there is a modification to an existing alimony Order of Agreement, after December 31, 2018.
The change in the tax code with respect to alimony may impact divorce negotiations and settlement, as the mutual tax benefit is eliminated. Payors may be far less inclined to pay alimony and the amount which could be affordably paid may decrease. It is yet to be seen how Courts and/or state legislature will address this change, as many support guidelines factor in the tax shifting provisions under the old tax code. It is also unclear if the new alimony tax rules will also apply to spousal support and/or alimony pendente lite (APL), which in Pennsylvania is support paid either before a divorce is filed or during the divorce litigation. Typically, such support was also tax deductible to the payor and taxable income to payee. This will be a developing area of the law in light of the change.
If you are currently divorcing or about to start the process, you may want to finalize your case before the new alimony tax code provisions go into effect on January 1, 2019, so that you can take advantage of the tax saving benefits.