Major Changes in the New Tax Law to Divorce and Alimony
By John C. Whitbeck, Jr., Esquire
The major tax overhaul passed by Congress and signed into law is going to impact divorces and alimony in a big way.
Beginning January 1, 2019 the spouse paying alimony will no longer have the ability to deduct their payments on their taxes. Conversely, the spouse receiving alimony will no longer have to pay taxes on the alimony they receive. However, if you sign a marital settlement agreement or finalize your divorce before December 31, 2018 the new law will not apply to you, at least not right away.
The new law also provides a specific provision regarding the modification of alimony. In other words, the law addresses a situation where your divorce or settlement agreement was finalized prior to December 31, 2018 but alimony is later modified after the new law goes into effect. The law provides alimony modified after December 31, 2018 would be subject to the new tax law provided the modification expressly provides that the new tax law applies to the modification. While it is not exactly clear that that means, it appears that in order for the new the new tax laws to apply to modified alimony, the court order or agreement as to the modification must “opt in” to the new tax law. It remains to be seen how that plays out in real litigation.
The truth is, an effective attorney can help either the payor spouse or the recipient spouse come up with a plan that keeps you right about the same place you would be under the old law. It’s just a matter of doing things a little differently and having an attorney with the experience and knowledge to assist you. Here are some of the issues to consider:
Do I want to wait and get divorced after the new law goes into effect? In Virginia, you can’t get divorced until one year after you separate unless you have no minor children and you sign a settlement agreement. So your ability to actually get divorced before the new law goes into effect may be in question. If you are the higher income earning spouse in danger of paying alimony you would think you have every incentive to get your case settled within the next 12 months so you can take advantage of the tax deduction as long as you can. However, that may not necessarily be possible or advisable so you should discuss this with an attorney.
Do I want to push my divorce out after December 31, 2018? If you are the spouse who needs to get alimony, you would think that your incentive is to push your case as long as you can into 2019 so you don’t have to pay taxes on your alimony payments. However, there may be incentives to the payor spouse to get the case done quicker so they can keep the tax deduction and you may actually get a better deal settling in 2017. Every case is different so talking to an attorney your options is imperative.
Do you want alimony to be modifiable? In Virginia, alimony can only be changed after the divorce if it was court-ordered in litigation or the parties’ settlement specifically says alimony is modifiable. It is important to consider whether you want alimony to be modifiable in the future if your divorce is finalized prior to December 31, 2018. It is also important to consider whether you want to litigate alimony versus settle out-of-court. If your divorce is already final and you are paying/receiving alimony it would be a good idea to consult with an attorney about how the new law affects your alimony payments if they are ever modified.
How does the division of my assets impact alimony? In Virginia the court determines alimony using a series of statutory factors. One of the factors is the division of the marital assets and debts. You should consider approaching the division of assets differently than you otherwise would based on the changes to the tax treatment of alimony.
How do I factor in the tax issues around alimony into my divorce case? One of the factors a Virginia court must consider in determining alimony is the tax consequences to each party of alimony. You may wish to consider consulting with tax professionals and prepare to negotiate or litigate with full knowledge of the tax situation with your alimony.
How does the tax change for alimony affect child support? Child support was already non-taxable and non-deductible before this new law was passed. Starting in 2019 under the new law alimony will be the same. Because child support is based on gross income, the tax treatment of alimony does not impact child support calculations per se. However, alimony and child support are often negotiated together so there will likely be an impact on how agreements on the payment of both are reached.
If I am getting married in 2018 and beyond do I want a prenup? Premarital agreements (aka “prenups”) are a great way of avoiding nasty and expensive litigation in the future. Now that the tax laws have changed, you may want to consider dealing with the alimony issue prior to the marriage in an agreement.
As you can see there are many issues that arise from this new tax law and it is important to have an attorney evaluate your case and how the new law impacts you. Call us 703-777-1795 now for a consultation.