Federal tax treatment of alimony to change after 75 years of stability
Major changes take effect in 2019.
The new federal tax bill will make major changes to the tax treatment of alimony, which has remained unchanged since 1942. Currently, every dollar of alimony paid is deductable by the paying ex-spouse, reducing his or her taxable income by that amount and thereby reducing his or her tax bill. This will remain true for divorces finalized, or valid prenuptial or separation agreements resolving alimony arrangements signed, through the end of 2018. Beginning with 2019 divorces, prenuptial or separation agreements, alimony paid will no longer be deductable on federal returns.
To be safe, if in 2018 a couple signs a prenuptial or separation agreement in which they agree to alimony terms, it is recommended to have the state court affirm it in a court order before 2019.
Impact on alimony recipients
On the receiving end, current law categorizes alimony received as taxable income, but the new law will change alimony to nontaxable income for divorces after 2018. While this sounds favorable for recipients, because of the loss of deductibility to paying ex-spouses and the likely reduction in payment amounts likely to result, “divorce lawyers don’t expect [the change to nontaxable status] to offset the loss from a lower payout,” according to Bloomberg.
(Virginia law calls alimony “support and maintenance” for a spouse. Other terms sometimes used to refer to alimony are spousal support or spousal maintenance.)
Impact on divorce settlement negotiations
Many Virginia couples are able to negotiate settlement agreements that resolve the issues of whether alimony will be paid, in what amount and for how long. Historically under current tax law, the paying spouse would know that whatever alimony he or she agreed to pay, its federal tax deductibility would make it financially easier.
According to Bloomberg, about two-thirds of attorneys responding to an American Academy of Matrimonial Lawyers poll said they “expect divorce negotiations to become more acrimonious …” under the new law.
Without the deduction, some potential payors will be more hesitant to agree to a generous spousal support award because of the loss of accompanying tax relief, viewing alimony as too expensive. On the other hand, when the potential recipient is concerned about money because of a lower earning capacity or financial strain as a custodial parent, the need for generous alimony is also likely to increase the tension of negotiations.
Impact on Virginia divorce proceedings
With less likelihood of settlement, the question of alimony may end up before judges more often. One factor a Virginia judge is required to consider in determining whether maintenance would be equitable in any particular divorce is the “tax consequences to each party …” While all relevant factors are considered by judges, the tax factor may weigh against granting alimony at all in some cases or influence a trend toward lower amounts.
A protracted divorce trial is normally more expensive because of the increased legal fees than a settlement would have been. This, combined with the new tax treatment of alimony, may even force some couples to postpone divorce, speculates a mediation expert cited by CNBC.
Another impact of the new tax law’s treatment of alimony may be on the ability of support recipients, more often women, to put away money for retirement because contributions normally must be from taxable income, since alimony will become nontaxable in 2019.
CNBC notes that it is not clear whether existing alimony agreements and divorce decrees with alimony provisions would be subject to the new law if modified after 2018, when the new law will be in force. This uncertainty may also push some to ask courts for modifications before 2019.
Another unknown concerns the tax treatment of alimony payments called for in prenuptial agreements signed before 2019 with predetermined alimony terms that would kick in should divorce occur in the future. Most of these will have been negotiated before the new tax law with the assumption that tax treatment would continue as it has been for decades. For divorces after 2018 with valid prenups that determine alimony upon divorce, courts will have to determine whether the old or the new tax treatment applies.
This uncertainty may cause some spouses who are party to such agreements to attempt to renegotiate these alimony terms through postmarital agreements before 2019.
A big issue for anyone contemplating divorce is whether to try to finalize it or sign an agreement on alimony terms affirmed by court order before 2019 to take advantage of the current deductibility of alimony. Some think this may cause a collective rush to divorce in 2018. Anyone facing potential divorce or any other alimony issue should speak with an experienced attorney as soon as possible so that the family situation can be thoroughly analyzed in light of the new law and with an eye toward advantageous timing.
Attorney Tom Breeden of Thomas R. Breeden, P.C., in Manassas represents and counsels clients throughout Northern Virginia facing divorce or related legal issues.