Tax Treatment of Alimony Payments Under the TCJA
Sep 5, 2018 | Written by: | Share
Earlier this year, Congress passed, and the President signed into law, the Tax Cuts and Jobs Act (TCJA). While many of its provisions received a great deal of media attention, one in particular has flown under the radar despite the fact that it may have a substantial impact on parties going through a divorce. That part of the Act addresses the tax treatment of alimony payments made pursuant to a court order, or under a separation or divorce settlement agreement.
Under current law, payments of alimony are taxable as ordinary income to the party receiving the payments and fully tax deductible to the paying spouse. There are a number of requirements that must be met in order for payments to qualify as alimony. Among others, these include the following: the payments must be made under a written instrument, they must be paid to or on behalf of the former spouse, the parties cannot reside together, the payments must be in cash or cash equivalents, and the agreement must provide that the payments must stop upon the death of the recipient.
The current tax treatment of alimony will change for all divorce agreements executed after December 31, 2018. Instead, for all agreements executed as of January 1, 2019 and thereafter, alimony will not be taxable to the recipient nor will it be tax deductible to the paying spouse. The "old law" treatment of alimony as taxable and deductible will continue for those whose agreements are executed on or before December 31, 2018.
Some commentators have claimed this new law will present an advantage to the spouse who expects to receive alimony and therefore it is in the best interest of that party to "stall" a divorce until the end of this year. I disagree. Instead, the only winner will be the Internal Revenue Service, which will collect taxes at a higher marginal rate (that of the paying spouse) instead of a lower marginal rate (that of the receiving spouse). Stated differently, it is very likely that the amount of alimony awarded in 2019 and thereafter will be less than that under current law, due to the disparate tax treatment. In fact, the current New Jersey alimony statute lists the tax treatment of alimony as a factor to be considered when establishing the amount of alimony. Thus, this will be a "lose/lose" proposition for the parties.
In closing, although deciding to pursue a divorce or to settle the financial issues in a pending divorce action is complex and involves many considerations, one of those many considerations should be the impact of this new tax law on alimony payments. Feel free to contact the lawyers in our Family Law Department to discuss this issue or any others.
William W. Goodwin, Jr., Esq. is certified by the NJ Supreme Court as a Matrimonial Attorney. He is also qualified as a Mediator in the field of Family Law under the New Jersey Court rules, and he is trained in Collaborative Divorce. Contact Mr. Goodwin at 908-735-5161 or via email.
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