New Year, New Alimony Rules

Who doesn’t like a tax deduction?  Less money to the government, and more money in your pocket.  If you are a current payer of alimony, then you know the “joy” of deducting your alimony payments.  Unfortunately, anyone ordered to pay alimony on or after January 1, 2019 will not feel that “joy.”  The new Tax Cuts and Jobs Act changed the ability to deduct alimony payments and leaves the future of alimony awards up in the air.

The Tax Cuts and Jobs Act (“TCJA”) passed in late 2017 drastically changed the rules for alimony deductions.  Traditionally, a spouse or ex-spouse ordered to pay alimony can deduct those payments “above-the-line” on federal income taxes.  Under the TCJA, any order or stipulation for alimony executed after December 31, 2018 does not permit the deduction.  For some, this inability to deduct can result in a substantial difference in tax payments. 

Any alimony ordered prior to January 1, 2019, can still take advantage of the tax deduction benefit.  If the alimony payments continue to qualify as deductible alimony, then the ability to deduct above-the-line remains in effect.  One loophole is that if a pre-January 1, 2019 order for alimony is modified on or after January 1, 2019, the modified order or stipulation can state the TCJA treatment of alimony payments now applies, and any future payments will not be considered tax deductible.

What does this mean for future alimony awards?  Will courts be more meticulous in weighing the monetary impact of alimony on the parties?  After all, alimony awarded and paid after December 31, 2018 is the equivalent of a property settlement or child support payment – a nondeductible personal expense for the payer, and tax-free money for the recipient.

With the unknown future of alimony, and the role of courts in granting awards of alimony, it is important to know the impact alimony will have on your future, whether payer or receiver.  there is no benefit, except to the receiver, a parties’ willingness to accept an order or stipulation to pay alimony is less likely.  In this sense, alimony now carries an even greater weight as a negotiation tool in settlement talks. For more information, call our Sioux Falls, Sioux City, or Omaha office today.