If you have been contemplating or are in the process of getting a divorce, you may be wondering how changes to the tax code under the Tax Cuts and Jobs Act (“TCJA”) will affect you. The key tax code change in question is the repeal of the alimony deduction that has been in place since 1942.
The simple facts
There are a few things that we know for sure, based on what is written in the Tax Cuts and Jobs Act:
If you get divorced after December 31, 2018, and you pay alimony – or spousal maintenance as it’s known in Texas – that alimony will no longer be tax deductible for the payor. In addition, the recipient won’t have to pay taxes on alimony, as it is no longer considered income.
Beyond those basic facts, there has been much speculation regarding how the repeal will affect people who file for divorce and try to negotiate divorce settlements. Experts in divorce, tax law, and financial planning have also raised concerns about the financial impact the change will have on both the payor and payee.
Based on our experience as divorce attorneys and what other experts are speculating, the following is what we expect may occur due to the elimination of the alimony deduction.
More couples are likely seeing the courtroom
Many experts speculate that the elimination of the alimony deduction will result in fewer couples negotiating divorce settlements outside of court. The alimony deduction has been very attractive for some monied spouses, because it reduced the amount of income they had to pay taxes on, often resulting in significant savings for the payor.
With the deduction repealed, monied spouses will have less incentive to agree to provide support to help a spouse get back on her (or his) feet after divorce.
The fact that the law is effective after December 31, 2018, could help settlement negotiations this year. Thereafter, it will become more difficult to settle in certain cases, which means divorce lawyers will likely be going to court with clients more often.
The alimony repeal could also affect divorce modifications
Many couples decide or are forced to modify their initial agreements after the divorce has been finalized. The courts traditionally consider these divorce modifications new agreements, which could be an issue for couples that included alimony in a past agreement that is subject to modification, especially those who don’t want to lose the deduction or the alimony. This could force some couples to decide against a modification, leaving them stuck with other arrangements that no longer suit their or their family’s needs.
Because this change applies to modifications after December 31, 2018, if the modification specifically states that the TCJA treatment of alimony payments applies, it is very important to meet with an attorney to ensure that the correct language is included in any subsequent modification.
Couples that get divorced before the end of 2018 should consider including language in their divorce agreements to ensure alimony is grandfathered in, should a future divorce modification be necessary.
Learn more about child custody modifications in Texas here.
Women and local governments could be hit hardest
Not receiving a supplemental financial settlement could be especially devastating for women in states like Texas (98 percent of alimony recipients are women), where the monied spouse is required to pay minimal or no spousal support in most cases.
In Texas, $5,000/month (or 20 percent of the spouse’s average monthly gross income, whichever is less) is the maximum amount of spousal maintenance a spouse could be ordered to pay. In addition, people must meet difficult requirements to qualify for spousal maintenance in Texas, such as being married a minimum of 10 years and unable to provide for their minimum reasonable needs. Even if spousal maintenance is ordered, the judge in most cases can only order maintenance to be paid for a limited period of time.
Neither spousal maintenance nor child support is intended to equalize the living circumstances the spouse and/or children experienced prior to a divorce in Texas. Women who haven’t worked outside the home for a long time – if ever – and who have minimal education or job skills may struggle to find a job that pays enough money to meet their and their children’s needs.
This could also place an additional burden on state and local governments that may end up paying out more in social services to women and mothers who could have received a better financial settlement prior to the alimony deduction repeal.
Both parties could face negative financial implications related to dividing non-liquid assets
During a divorce, assets, and debts need to be split between the two parties. Couples with minimal liquid assets to divide could face additional challenges under the new tax code. In the past, people often chose to hold on to non-liquid assets longer and pay out a certain amount of equity from that asset over time – which could also allow both parties to continue getting income from that asset. A potential win-win.
Once the repeal goes into effect, couples may be forced to sell non-liquid assets at an unfavorable time or a non-monied spouse could end up being awarded an asset he or she can’t afford to maintain. Prior to the TCJA, supplemental alimony could be used to help pay for any number of expenses needed to keep an asset and, in some cases, alimony could also be utilized to keep an asset profitable and/or prevent it from losing value due to disrepair.
If fewer parties negotiate settlements outside of court, more couples will probably face negative implications related to such non-liquid assets.
Best time to divorce with the alimony repeal on the horizon? It depends
If the alimony deduction or receiving alimony appeals to you, then you should file for divorce sooner rather than later. Keep in mind that some states have a set waiting period before you can divorce. For example, here in Texas, there is a 60-day waiting period before a couple can be granted a divorce, so don’t wait until November to call a divorce attorney.
If you don’t want to pay alimony, biding your time and waiting to file until 2019 could make the most sense for you. Do understand that there are other financial considerations – like the tax deduction – that could benefit you if you finalize your divorce in 2018. Reach out to tax, financial and family law experts to weigh your options.
If you’re not in a rush to get divorced, for financial or other reasons, you – and your spouse – could consider waiting it out. The legislature could change the tax code again, especially if a different party wins the presidential election in 2020. Again, contact tax, financial and legal experts for advice if you are considering a divorce.
To learn how the alimony deduction repeal may affect you, contact a divorce lawyer for advice
He or she can explain what you can expect if you divorce before or after the repeal and recommend tax and legal experts if you need additional information.
Alissa Castrois a family law attorney with experience in a wide variety of legal venues and is committed to obtaining the best results for her clients. She is an active member of the Dallas Association of Young Lawyers and has donated her services to several charitable causes including the Dallas Volunteer Attorney Program, Mississippi Volunteer Lawyer Project and Catholic Charities. To learn more about divorce and child custody options in Dallas and Collin Counties, please call (214) 617-1583 to speak confidentially with a knowledgeable and considerate member of the Connatser Family Law team.