New tax law to change tax treatment of alimony paid and received

Alimony will no longer be deductible for future divorces starting in 2019.

It will probably take years to completely understand all the impacts of the massive federal tax bill signed last year. But one little provision could have potentially significant negative repercussions for divorce negotiations and future alimony recipients.

Current tax treatment of spousal support

For 75 years, alimony, known in Virginia as spousal support, has been deductible on the paying ex-spouse's tax return and taxable income to the recipient. Looking at the divorced couple as an economic unit, this arrangement leaves more money to work with within the unit, because the money is taxed at the recipient's rate, likely a lower one, leaving more dollars to spread around between the two households.

In addition, the deductibility of spousal support can be important to a paying spouse as a way to lower taxable income and ultimately, taxes paid. Because of this tax break, a spouse may be more comfortable being more generous when negotiating the terms of a divorce settlement agreement.

Changes in 2019

The Tax cuts and Jobs Act or TCJA provides that beginning with divorce agreements signed or divorce orders made after 2018, alimony will no longer be deductible and the recipient will have to add it to his or her taxable income and pay taxes on it. At the time of this writing, this leaves about seven months to get through divorce negotiations and draft and sign an acceptable agreement (or get through a trial if settlement is not possible).

If the issue is contested and goes before the judge in the divorce in 2018, there is no guarantee of when the final order will be ready and put into effect, so if the 2019 deadline is important, the matter should be discussed with a knowledgeable attorney.

The tax treatment will not change for people already divorced, except that if the alimony award is modified after 2018, the parties can choose the new tax treatment as an option.

Future impact of law change

Many legal commentators think that because alimony will be more expensive to paying spouses, settlement negotiations could become more heated. Payors may just feel less generous if the payments are more expensive in the long run than they used to be.

Virginia law requires that a judge in determining the amount of a spousal support award must consider each factor in a specific list and one of those required considerations is the tax consequences of the potential award. Should negotiations fail and the issue of alimony be contested in court, the new tax treatment may cause the judge to lean toward a smaller award because the payor will not be able to deduct it.

Time is of the essence

Anyone contemplating divorce should speak with an experienced attorney as soon as possible since a divorcing couple can lock into the current tax treatment by finalizing their agreement before 2019. The lawyer can look at all timing issues and help the spouse to take steps to protect his or her interests.

Many provisions in the new law sunset (automatically get repealed) after 2025, but the changes to the tax treatment of spousal support are permanent, unless a new law takes effect.

Why was this done? AP reports that the Joint Committee on Taxation in Congress says that over a decade, the changes will increase federal revenue by almost $7 billion, but that this is a drop in the bucket compared to the $1.5 trillion in tax cuts included in the bill.

The family lawyers at Barnes & Diehl, P.C., with offices in Richmond (Chesterfield), Henrico and Hanover (Mechanicsville), Virginia, represent divorce clients across the state.