The Tax Cuts and Jobs Act (TCJA) has led to major changes to the tax code. One specific change will directly impact divorce. This change involves how the Internal Revenue Service (IRS) will tax alimony payments.
How does the IRS view alimony payments? It is important that every divorcing couple recognize the IRS will play a role in their divorce. Virtually every monetary transaction can face a tax. The only notable exception are child support payments.
Alimony is not an exception. Currently, the IRS allows the individual making the alimony payment to take a tax deduction. The individual receiving the payment must then account for the funds on his or her income tax returns.
How does the TCJA change this? The new tax law will remove the paying individual’s ability to deduct the alimony payment from his or her tax filings. The individual that receives this payment will no longer need to report the funds. Essentially, the tax is covered by the paying individual.
Critics have voiced concern that the removal of the deduction will make it more difficult to negotiate an alimony payment. They point to the deduction as a valuable bargaining chip that is no longer available to the spouse requesting alimony.
What does this mean for my divorce? Some couples will decide to finalize a divorce settlement agreement prior to 2019. The current tax law will apply to couples that finalize their divorce in 2018. Those that are not will be subject to the new tax law.