By: Minh Luong
The Tax Cuts and Jobs Act of 2017 (“TCJA”) was recently passed by Congress on December 20, 2017 and signed by President Trump on December 22, 2017. TCJA obviously has an impact on corporate taxes. Savvy businesspeople will look for ways to legitimately avoid taxes by taking advantage of new tax laws.
TCJA also affects family law. Specifically, TCJA will change the way alimony/spousal support is taxed. A prudent person should also look for lawful ways to avoid or minimize taxes based on the provisions of the new tax law.
Alimony, also known as spousal support, is a payment from one spouse to another dependent spouse to help support and maintain a standard of living during or after a divorce. In California, in long-term marriages lasting 10 years or longer, a spouse may receive alimony until the death of one party or until the party receiving alimony remarries (Cal. Fam. Code § 4337). The alimony payment can be made over an indefinite number of years and can therefore be significant. The tax consequences can therefore also be significant.
In the past, the payer of alimony generally deducted taxes from the alimony payment, and the recipient's alimony was taxed as the recipient's income. The new TCJA eliminated this general division of taxpayers. Those who pay maintenance can no longer deduct maintenance payments from their taxable income and those who receive maintenance no longer have to include it in their taxable income. There will be a significant tax increase for those who pay alimony.
When does the new TCJA take effect? Timing is everything.
Existing maintenance agreements remain in effect. In other words, the TCJA will not affect support taxes for these individuals and the payer would continue to receive a tax deduction. However, additional requirements apply to the tax deduction. These requirements include, but are not limited to: The ex-spouses may not file a joint tax return. payment must be made in cash; the payment is made to a former spouse under a divorce or separation deed; in the separation document the payment is referred to as alimony; and the payment will not be treated as child support or property settlement.
If a support agreement exists, the parties may adjust their spousal support to reflect the new federal law after December 31, 2018. The parties may elect that the alimony payment is not deductible to the payer and that the payment is not taxable to the spousal support recipients. The parties would have to expressly declare in writing that the new law should apply.
If there is no alimony order but the couple signs a prenuptial agreement before the end of this year, December 31, 2018, the alimony would be tax deductible for the payer. If you are considering a divorce and need to pay alimony, consider contacting an attorney to expedite the process. If the ruling is final before the end of the year, it could potentially save the payer a lot of money in the long run. On the other hand, if you want to receive alimony payments, you may want to wait until after the year is over to sign them so that you don't become liable for taxes. Alternatively, you can hire a lawyer to negotiate a higher alimony with the other party in exchange for the settlement being finalized before the end of the year. This would save the payee taxes for many years.
If the settlement agreement or judgment is signed after December 31, 2018, the paying spouse would no longer receive the tax deduction benefit. The TCJA alimony provision would be effective for divorce and separation agreements signed after December 31, 2018.
Prior to TCJA, many couples entered into a prenuptial agreement that provided that the payer could deduct alimony and the recipient would pay taxes. The law is uncertain as to the outcome and legality of such provisions. It is probably unlikely that the prenuptial agreement will escape tax liability and the TCJA. However, if you have a prenuptial agreement, you should consult with an attorney to add language to the prenuptial agreement that addresses the uncertainty. Alternatively, the lawyer can amend the existing prenuptial agreement to reflect the tax liability.
Understanding new tax law can have a significant impact on negotiations during a divorce settlement. If you are concerned about paying unnecessary taxes in addition to paying alimony, you should contact an attorney for legal advice.
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