On December 22, 2017, President Trump signed into law tax reform legislation (Pub. L. No. 115-97, the “Act”) that repeals the long-standing tax treatment of alimony payments as deductible to the paying spouse. What does this mean, and how could it affect your divorce? Well, generally speaking, effective January 1, 2019 a payor spouse will no longer be able to deduct alimony payments from their gross income. Alimony is almost always a highly contentious and emotional subject during divorce negotiations, and the Act has singlehandedly destroyed any leverage a payee spouse had to negotiate a higher alimony award. Why, you say? Payor spouses are generally in higher tax brackets than alimony recipients, and the Act has taken away the amount of tax savings the payor spouse previously received by deducting alimony payments. The Act has disincentivized the payor spouse from paying a higher alimony amount because ultimately, there will be less money in the pot at the end of the day to divvy up.
Further complicating matters is the fact that the Act can also apply to divorce or separation “instruments” entered into on or before December 31, 2018 and modified after that date, so long as the modification expressly provides that the Act should apply to the modification. Scratching your head?
Here’s the practical application: You and your Ex-Spouse amicably settled your divorce out of Court, entered into the terms of a Marital Settlement Agreement, and divorced in 2010. You move the Court to modify the terms of the Marital Settlement Agreement (the “Agreement”) to decrease alimony payments. Under the terms of the Agreement, the alimony payments are currently classified as taxable to your Ex-Spouse, and deductible to you. If the Court grants your request, the Court now has the discretion to either apply the Act and tax YOU on the alimony payments or continue to classify the payments as taxable and deductible. The point is – it’s up to the Court, not you.
And what about prenuptial agreements? Does a prenuptial agreement qualify as a “divorce or separation instrument?” It’s still up for debate, but in all likelihood, probably not. Current tax law defines a divorce or separation instrument as:
- “A decree of divorce or separate maintenance or a written instrument incident to that decree;
- A written separation agreement, or
- A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse.” See L. No.504
If your prenuptial agreement includes terms governing alimony that are no longer in line with current law, you should strongly consider revisiting your prenup to determine the extent to which you, or your spouse, may have greater tax obligations once the deduction for alimony is removed.
Concerned about the way your prenup handles alimony? Long & Associates, P.A. represent clients in all areas of family law litigation. Please contact Long & Associates, P.A. at 239-316-1600 or e-mail us at firstname.lastname@example.org to set a confidential appointment with one of our Naples Family Law attorneys today.