Tax changes promulgated with introduction of Tax Cuts and Jobs Act (“TCJA”) in 2017 will affect large groups of population, including couples finalizing their divorce in 2019. Beginning January 1, 2019 the paying spouse will no longer be able take deduct alimony, and the recipient spouse will not need to report alimony as income. That is the alimony payments will be treated same as child support payments.
That is, all agreements made or orders entered from that date forward, the party paying alimony will not be able to deduction such payments on his/her tax return. The receiving party will not declare the alimony payments as taxable income.
All types of divorce instruments effectuated prior to January 1, 2019, including written separation agreements will execute alimony transactions as deductible and income reportable for the payer and receiver, respectively. Existing agreements, or an agreement reached by December 31, 2018 won’t be affected by the new changes.
In addition, the new tax legislation temporary abolished personal exemptions and deductions that have a bearing effect on divorce settlements. Effective December 31, 2017 and until December 31, 2025 parents are unable to use personal exemption deduction for dependent children, as well as to decide which parent can claim personal exemption. That is neither parent will take the child/children in care exemption.
Furthermore, new tax law introduced changes that Child Tax Credit, increasing the credit from $1,000 to $2,000 for each child, a significant portion of which ($1,400) is now deductible under the new legislature.
As the deadline for the new legislature to take effect approaching, it is important for couples undergoing divorce to be familiar with incoming changes and how they might affect them.
Even if the alimony payments are to commence in the future, any divorce or separation agreement executed prior to January 1, 2019 will be treated according with the before-TCJA internal revenue codes for tax deduction purposes.
Under the new provision because the alimony payments are not tax deductible it would appear that provision dis-incentivizes or discourages such payments. However, because in return the receiving party does not report such as income – this in effect balances the equation and should have no long term effect on the incentives for parties to resolve matters amicably.
Refer to our Washington DC Divorce page for more information on this topic.