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The Impact of the Tax Cuts and Jobs Act on Income and Alimony

I is for Income:

The Impact of the Tax Cuts and Jobs Act on Income and Alimony

By: Alexandra Freed, Esq.

Major tax reform was approved by Congress in the Tax Cuts and Jobs Act on December 22, 2017.  Implementation of the tax legislation will impact parties in divorce and most post-judgment litigation in numerous ways.

The one of the most significant impact will be with respect to how alimony payments are taxed. Previously, alimony payments were taxable to the receiving spouse ( “the payee”) and tax deductible the paying spouse (“the payor”). Under the Tax Cuts and Jobs Act, alimony payments are no longer taxable to the payee or tax deductible to the payor.

Who will be impacted by this change?
This provision becomes effective for agreements and orders entered by the Court on or after January 1, 2019. It does not apply retroactively to agreements or orders entered by the Court prior to January 1, 2019. Therefore, if you have a marital settlement agreement, which specifies that alimony payments shall be taxable to the payee and tax deductible to the payor and it was entered prior to January 1, 2019. This provision will not impact how the alimony payments in your agreement are taxed. However, if you are considering or seeking a modification of an alimony agreement that was entered into prior to January 1, 2019, this provision of the Tax Cuts and Jobs Act may impact you. It is unclear at this point in time how the Internal Revenue Service (“IRS”) will apply this provision of the Tax Cuts and Jobs to modifications of alimony agreements.

What impact will this provision have on your income?
By way of example, if a payor earned $100,000 gross per annum and paid $12,000 per year in alimony, then the payor’s taxable income would be $87,000 gross per annum rather than $100,000 gross per annum if the agreement or order as to alimony was entered by the Court before January 1, 2019. For agreements and orders entered by the Court on or after January 1, 2019, the payor’s taxable income remains $100,000 gross per annum regardless of the amount of alimony paid.

Likewise, for agreements and orders entered by the Court before January 1, 2019, if the payee spouse earned $50,000 per year and received $12,000 per year in alimony, then the payee’s taxable income would be $62,000 gross per annum rather than $50,000 gross per annum. For agreements entered on or after January 1, 2019 the payee’s taxable income remains $50,000 gross per annum.

Due to the impact on your taxable income, this provision will have an associated impact on the amount of alimony awards.

If you have questions about how the Tax Cuts and Jobs Act will impact your divorce or post-judgment litigation, please contact an attorney at Ulrichsen Rosen & Freed LLC at 609-730-3850.