By Tracy Ann Moore-Grant
As of January 1, 2019, the tax consequences of alimony have changed. For agreements or court orders after that date, alimony is no longer tax deductible by the paying spouse or taxed as income to the receiving spouse. With this change, there are two main categories of cases impacted by this change. The first is divorces being resolved in 2019 and after and the second is alimony previously resolved but seeking a modification of a prior alimony award in in 2019 and beyond.
With divorces being resolved in 2019 and forward, parties are approaching their negotiations in a different way. In the past, it was an easier “sell” to get the financially dominant spouse on paying alimony because the amount of the payment was an above the line deduction to the paying spouse. The receiving spouse was also required to include alimony received in their income and was taxed accordingly. But with the change in tax treatment, alimony payments are now essential a non-taxable event to either party. The impact has been tougher negotiations, parties taking a deeper look into their finances and caring more about the tax treatment of other assets subject to division. Parties are negotiating harder for the assets with the best tax advantage either now or at the time of retirement and are more interested in receiving the assets with the best tax treatment. Financially dependent spouses have even less assurance that they will receive alimony to assist with regular monthly expenses as there is no tax advantage for the other party to pay.
For divorce decrees entered prior to the tax change of 2019, alimony is defined as either modifiable or nonmodifiable based on the agreement of the parties or how the Judge ordered in in a Final Order from their divorce. Many parties have alimony as modifiable in order to allow the financially dominant spouse some relief should they have the need to modify due to job loss, diminished health or other valid life changes. For most, it was unforeseen that the tax law would change in the future and that this change would impact their ability to modify future payment should they suffer a hardship. However, if a paying spouse modifies in 2019 or after, the modification is considered a new court order and loses the tax deduction treatment it currently had. Orders prior to 2019 are grandfathered in and allowed to remain tax deductible but new court orders will fall under the new tax treatment. Paying spouses looking to modify must now not only examine the cost of litigation and their personal budget, but also how the change in the tax treatment of future payment could impact their tax liability.
For attorneys, our discussions with our clients whose cases involve alimony should now dig a little deeper. In initial divorce cases, we need to be sure we get information on all of the types of accounts (IRA, Roth IRA, pension, 401(k)…) the couples have and perhaps enlist the assistance of a certified divorce financial analyst in order to have the best information available for any negotiation. For paying spouses seeking to modify, our advice should not just include financial ability to pay and address any change in circumstance, but also be sure to advise that any new order would remove the tax advantage currently enjoyed with an older order. As always, it is good to seek assistance for financial professionals who can help a client run the numbers and get the best information possible to make informed decisions.