March 4, 2019

The Effect of the 2019 Tax Law on Divorce

By Lisa Wiberg, Supervisor, Tax & Business Services

Related Services Tax & Business, Personal Financial Management, Family Wealth Services, Cost Recovery & Accounting Methods, Tax Return Compliance, Corporate Tax, Valuation, Forensic & Litigation Services, Valuation

The Effect of the 2019 Tax Law on Divorce Tax & Business

The Tax Cuts and Jobs Act (TCJA) of 2017 modified the treatment of alimony payments. As of January 1, 2019, alimony is no longer tax deductible to the payor and taxable as income to the former spouse. The TCJA states, “this section repeals the deduction for alimony or separate maintenance payments from the payor spouse and the corresponding inclusion of the payments in the gross income of the recipient spouse.” Under the new tax code, all alimony obligations are now paid with after-tax dollars. The tax implications are not retroactive; therefore, divorces finalized prior to January 1, 2019, will still maintain tax-deductible status for a payor. The new tax treatment impacts those individuals whose divorces are finalized after December 31, 2018.

The new law may impact those who have an existing prenuptial or postnuptial agreement that provides for a specific alimony amount (entered into when alimony was deductible under Sec. 215). Will a court permit such agreements to be modified now that the tax rules have changed, rendering any such alimony payments as nondeductible under TCJA? Will new issues that arise by virtue of the TCJA constitute enough of a change in circumstances or other basis to warrant a modification in court? Married couples with prenups considering amending their agreements should also consider the potential exposure and seek the advice of their respective CPAs and attorneys.