Divorce is never easy, emotionally or financially, and now with the Tax Cuts and Jobs Act, the process can be even more taxing.
Prior to the passage of the sweeping tax reform law at the end of 2017, a divorced spouse paying alimony could deduct those payments from his or her reportable income when filing taxes. At the same time, the recipient of the alimony payments was required to report that as income for tax purposes.
Among the 119 tax provisions of the TCJA was the elimination of many personal deductions, including the alimony deduction for divorce or separation agreements executed after Dec. 31, 2018. This also applies to any divorce or separation agreements entered into on or before Dec. 31, 2018 but modified after that date.
The tax law changes could impact how ex-spouses negotiate who can claim which children as exemptions on tax returns. The TCJA eliminated most personal exemptions as it raised the standard deduction. This may mean that parties who negotiated good-faith agreements over who could take exemptions in which year will need to be prepared for the loss of those exemptions.
The loss of the alimony deduction can have significant tax implications and may require adjustments to long-term planning. This is one of the few provisions in the TCJA that is not slated to sunset after 2025. That stated, legislation of this sort is subject to political winds, so we recommend that you remain flexible when entering into separation agreements so that you can take advantage of any changes in tax law that may come down the pike.
These changes affecting divorce settlements should also prompt you to revisit your estate plans. While it is a good idea in any event to review and update your estate plan periodically, changes in the tax law make it especially important to make sure your heirs are protected from regulations that may not have been in effect when the will or trust was first created.
Please let us know if you have any concerns or questions that we can answer.