In December 2017, a new tax bill was enacted which will significantly affect divorces after 2018. The 2018 tax bill eliminates the alimony deduction for divorces that take place after 2018 which could lead to a boom in new divorce cases in 2018, before tax laws change for divorces occurring after 2018.
Under current law, properly structured alimony, or “spousal support”, is deductible by the payor, and included in income by the payee recipient. However, the 2018 tax bill significantly changed the rules. For divorces beginning in 2019, the payor spouse will no longer be able to deduct these payments from their income taxes. And the payee spouse receiving the payments will not have to report these as taxable income.
These new laws will only affect divorces occurring beginning January 1, 2019. In effect, the current tax laws are grandfathered in for divorces that are currently in place or will be finalized in 2018.
As a result, these tax impacts must be taken into consideration when crafting divorce agreements. The tax impacts between a divorce occurring in or before 2018 will be wildly different than a divorce occurring in or after 2019, assuming there is change in amounts.
This new tax bill will also force states to re-evaluate their maintenance guidelines. Currently, most states have established guidelines for maintenance payments based on income, length of marriage and other factors. For example, in Colorado one component of the guideline calls for maintenance to be paid to the lower earning spouse as much as 40% of the gross income of the higher paid spouse. With the new tax rules, these amounts could be reduced. The payor spouse will have a higher tax bill, and the payee spouse will have tax free income. Clearly this is going to have to be resolved at the state levels very quickly.