The Tax Cuts and Jobs Act – signed into law in December – modified the treatment of alimony payments, which could change what individuals are willing to pay and pressure divorcees to finalize cases before the new law takes effect.
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Under the previous statute, the higher-earning spouse could deduct alimony payments on his or her tax filings. The recipient included the payments as part of his or her taxable gross income.
However, for divorces finalized in 2019 and after, alimony payments will no longer be a deductible expense for the payor.
“There is no incentive to pay alimony now,” Emily Pollock, partner in the matrimonial and family law department at Kasowitz Benson Torres LLP, told FOX Business. “It’s really all just money out of the pocket for the payor … [it’s] harder to encourage that when you have no benefit to exchange.”
Typically, in a divorce where children are involved, the payor would also split support payments between alimony and child support, putting more into the former to claim the tax credit. Now, Pollock says, the payor is going to try to pay their child support and put less cash toward alimony.
Additionally, exemptions for dependents will be eliminated and replaced, so to speak, with the child tax credit. That is a worse deal for parents, Pollock said, because the exemption acts as a flat-out deduction while a credit goes up against the taxes you have to pay. Further, the threshold for the exemption was higher than what the credit provides.
The changes are most likely to affect higher-income families with a large differential in their tax brackets, Pollock noted.
Nevertheless, the new law is unlikely to lead to a big rush in divorce proceedings at this point in time, Pollock said. For high net worth individuals, negotiations are often protracted and rarely a two- to three-month process. However, Pollock is seeing pressure to finalize cases that are pending.