Change within the tax therapy of alimony within the US and its impression on divorce negotiations – taxes

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Change in the tax treatment of alimony in the United States and its impact on the divorce negotiation

February 12, 2020

Withers LLP

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Since 1942, a U.S. taxpayer in receipt of alimony or separate alimony had to include it as taxable income, unless the parties agreed that it would not be tax deductible for the payer. However, the Tax Reduction and Employment Act 2017 (“TCJA”) changed this longstanding rule. It no longer allows deductions for payment and at the same time excludes maintenance from income. Essentially, the new method leads to a tax-neutral transaction. Seems easier, doesn’t it?

Maybe in theory. The law applies to divorce or separation agreements entered into on or after January 1, 2019. However, it may also apply to agreements that were entered into before January 1, 2019, but which are changed after that date. The change must explicitly state that the changes to the TCJA apply to the changed agreement. All agreements that were made before January 1, 2019 were carried over into the old rules.

So what’s the problem? Unfortunately, this can become a headache for those who signed prenuptial agreements before January 1, 2019 but later divorce. If the marriage agreement restricts alimony based on tax deductibility that is no longer available, disputes and potential litigation may arise over the consequences of the change in rules. To avoid this problem, tax sensitive couples in the US should consider reviewing their marriage contracts and possibly changing them.

Since there is no longer any tax benefit associated with maintenance, taxpayers may want to find different ways to provide assistance. Options include adjusting maintenance amounts to reflect economic changes in the marriage agreement or paying lump sums. Others may want to transfer money from their individual retirement accounts. According to the Joint Tax Committee, the change will increase revenue for the IRS by approximately $ 6.9 billion over the next decade. While the IRS’s pockets can get full, many predict that overall upkeep could decrease as different types of backup care are used.

The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.

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