2019 Tax Changes to Alimony Payments in Virginia
With the arrival of 2019, new tax changes went into effect for any new divorce agreements and spousal support payment orders. The changes are part of the tax reform law called Tax Cuts and Jobs Act (TCJA) and includes a change to numerous popular tax deductions. One of these is the ability to take a deduction for alimony payments. This major change affects any divorce or separation agreements that are finalized after December 31, 2018.
Prior Tax implications of Spousal Support
Prior to 2019, spousal support payments were tax deductible for the person paying the support, or the payor. On the flip side, the recipient spouse was taxed on the payments they received. It was not uncommon to have the payor-spouse strategize to maximize the amount of money they paid under alimony and reduce child support payments or property distributions so they could take full advantage of the tax deduction benefit.
Previous qualifications to deduct alimony payments from income taxes were not necessarily that easy to begin with. Payments had to be made in cash (or the equivalent), ex-spouses could not reside in the same household or file joint tax returns, and more. This means not just any alimony payment made prior to 2019 is automatically tax deductible in the first place. There are eight rules listed in the Internal Revenue code that set forth the guidelines for tax deductible status.
New Rules in 2019
Currently, new divorce and separation agreements will not allow the payor to deduct spousal support payments from their taxable income, and the recipient does not have to pay taxes on the amount. Any divorce order that was in effect prior to January 1, 2019, is not affected unless there is a modification request. If the modification expressly notes any amendments are subject to the new TCJA rules, then any changes would mean no more tax deductions for the payor and no taxable income for the recipient. Otherwise, everything would remain the same under the prior tax rules.
What This Means for New Agreements?
Not surprisingly, this could create new arguments on deciding alimony during a divorce proceeding. Since the payor no longer gets a deduction, he or she is likely going to argue for the smallest payment amount possible. Since the recipient doesn’t have to claim these as taxable income, he or she will be pushing for a larger settlement amount.
Retaining a Virginia Divorce Attorney
This could lead to more dissention in settlement negotiations, and in turn see contested divorce matters taking longer to settle if both sides try to hold out for a more beneficial amount. A spouse who has the financial resources to keep the case in litigation may drag it out in hopes that their ex accepts a low-ball offer just to finalize things. This can be even more financially devastating for a spouse who has left the marital home and is trying to pay for their own living expenses on top of the expense of litigation. It’s important to retain a Virginia divorce attorney who can help you through this emotional and stressful time. Contact the skilled team at Whitbeck Cisneros McElroy PC at 703-997-4982 to schedule a consultation.