As a result of the so-called Tax Cuts and Jobs Act enacted at the end of 2017, alimony payments may no longer be deducted from the paying spouse’s taxable income. Likewise, the recipient spouse no longer has to report alimony as taxable income. The elimination of this tax benefits applies to all divorces finalized after January 1, 2019. This operates as a tax increase on divorcing spouses after that date, as well as those who modify the alimony order after that date with express language that the tax changes will apply to the modification.
Due to Congress’ elimination of the alimony tax benefit for divorces finalized after January 1, 2019, divorcing spouses should consider alternatives arrangements that may be more tax beneficial. For example, they may want to consider a buy-out of alimony instead of monthly payments. This can result in a substantial tax savings. The parties may also want to consider an alimony trust or other financial structure that may offer tax benefits that were otherwise eliminated by the Tax Cuts and Jobs Act.
Experienced counsel is necessary to negotiate marital settlement agreements under which alimony (or a similar arrangement) will be paid. If alternative structures are explored, counsel will need to explain the potential tax benefits and disadvantages. Our attorneys have expertise in complex alimony and related issues, and know when to advise clients to seek advice from a tax attorney or tax accountant as well.
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