Tax Bill Changes Affecting Alimony
27 July 2018IN: Family Law
You may have seen changes in your take home pay caused by the Tax Cut and Reform Bill signed in 2017. However, you may not be aware of the affect the tax bill will have on divorces especially those with alimony provisions finalized after December 31, 2018.
Prior Tax Treatment of Alimony
There are several factors which are used to determine whether alimony is appropriate and the amount to be paid. The primary factors are the need of the recipient and the ability to pay of the obligor.
Prior to the adoption of the recent tax bill persons paying alimony were able to deduct the payments from their federal income tax. The tax deduction benefit often encouraged persons to agree to pay alimony. Recipients of alimony were required to treat alimony payments as income for federal income tax purposes. This rule will continue to apply to current alimony obligations and court orders containing alimony obligations entered by December 31, 2018.
Future Tax Treatment of Alimony
Persons required to pay alimony pursuant to court orders entered after December 31, 2018 will no longer be permitted to deduct the payments from their federal income taxes and recipients will no longer be required to claim the payments as income. This could have negative consequences in reaching agreements in mediation and other settlement negotiations. This will also affect the treatment of alimony provisions contained in prenuptial agreements.
The tax treatment of alimony will be based upon the date of entry of the final divorce decree, not the date of filing the divorce action. Persons involved in pending divorce actions where they are likely to be ordered to pay alimony should seek to finalize their divorce prior to the end of 2018 to receive favorable tax treatment. This may be difficult for divorces not yet filed since there is a 60 to 90 day waiting period between filing and finalization in Tennessee divorces. Persons should also review and consider the tax consequences of alimony in the preparation of any prenuptial agreements.