As 2019 begins, many Americans will more directly see the effects of the Tax Cuts and Jobs Act (TCJA), which Congress passed in December 2017. These changes could be positive or negative when it comes time to file, depending on who you are.
One group of people who may notice a difference is divorcees. When your divorce was finalized will have an impact on your taxes.
Under the new tax law, anyone whose divorce is finalized after December 31, 2018 will be subject to new tax stipulations, which state that alimony payers are not able to write off their payments as taxable income, but recipients of alimony can write off those funds. Divorces finalized before December 31, 2018 have the inverse tax impact – payers can write off those payments as a deduction and recipients cannot.
This overhaul of alimony returns Americans to a system of determining taxable income for divorced couples established in 1917. The U.S. Supreme Court ruled at the time that alimony paid to a “wife” was not taxable income. A tax law in 1942 changed that, but the TCJA overhauls that law to return to the pre-1942 standard.
The trouble for divorcing couples where alimony will be a factor in the agreement is there will be fewer after-tax dollars to go around. It could set up many couples for contentious disputes that may not have occurred otherwise.
However, there are still ways for couples to come up with an agreement that keeps both parties living comfortable, fulfilling lives after divorce without financial hardship. While this law may change alimony’s impact on taxes, it does not mean divorcees will be left without the necessary funds to get by.