The Tax Cuts and Jobs Act has many controversial provisions, but one will have significant impact on many divorcing couples. The new tax law makes an unexpected change to a tax arrangement that has been central to American divorces for three-quarters of a century.
This change, many speculate, will make divorce settlement negotiations more contentious and supporting spouses less generous in agreeing to alimony obligations.
Tax treatment of alimony to change in 2019
For 75 years, alimony paid has been deductible on the payor’s federal tax return. To the recipient, alimony is classified as income to be taxed.
This arrangement has lightened the financial burden of divorced spouses paying alimony, since the deduction lessens the amount of taxes due. The impact of the deduction may also bump an alimony payor into a lower tax bracket.
Beginning with settlement agreements signed and divorces in 2019, a different tax treatment will kick in under the TCJA. For those divorces, alimony paid will no longer be deductible and alimony received not taxable as income.
Many people feel that this will make divorce negotiations more adversarial because paying alimony will be more of a financial burden if amounts paid are no longer deductible, lowering taxes. And while it seems that for recipients, having alimony no longer subject to tax would be a major bonus, some commentators speculate that because of the downward pressure on the size of awards because of new payor resistance, many recipients will be no better off in the long run.
Key timing issue
It is very important that anyone in South Florida (or anywhere) who is currently involved in divorce negotiations or proceedings, anyone considering divorce or anyone who suspects that his or her spouse may initiate a divorce talk to an experienced family law ASAP. Seasoned legal counsel, after considering all the circumstances and the upcoming change in law, may advise that the parties try to sign a settlement agreement or finalize the divorce in 2018 to avoid the change in tax treatment of alimony in 2019.
Potentially, some situations may warrant waiting until 2019 and the new tax scheme, although the opposite is more likely to be the case, depending on the situation.
Prenuptial agreements
A prenuptial agreement is a valid contract signed by two people planning to marry that becomes valid upon marriage. Prenups may cover many things, but a common subject is alimony. For example, the parties may agree that should they divorce, a set amount will be paid for alimony.
The problem is that with the change in alimony deductibility, the agreed-upon amount will become more expensive to the paying spouse. Those signing prenups before the new tax law would not have not foreseen the unexpected change in law at the time they signed their prenuptial agreements.
Any Floridian with a prenuptial agreement that seems unfair given the upcoming tax law change should seek legal advice. The parties may be able to renegotiate the contract, depending on whether its terms allow amendments regarding alimony. A possible alternative may be that a party could go to court to ask for a prenup modification based on equity, meaning basic fairness.
In some circumstances, it may be possible to invalidate a prenuptial agreement in court.
Another option might be to negotiate a postmarital agreement that has the effect of changing the terms of the prenup.
At our law firm, we stand ready to advise our clients of the impact of the law change on their situations and of their potential legal options.
