For couples facing divorce in 2018, the Tax Cuts and Jobs Act (TCJA) brought about changes that must be carefully considered when deciding what would be more beneficial financially: finalizing the divorce before Dec. 31, 2018, or postponing the divorce until after Jan. 1, 2019.
For post-2018 divorce agreements, tax laws change drastically. The law eliminates deductions for alimony to the payer, which is also referred to as spousal maintenance payments in Texas, and provides tax-free payments to the recipient. It is important to note that pre-2019 divorce agreements are not affected by the provisions of TCJA; they will remain deductible for the payer and taxable for the receiver.
Under current federal tax law, alimony payers receive the benefit of above-the-line deductions for payments made during the year to their former spouses, resulting in tax savings on the payer’s personal income tax returns. In most cases, the alimony recipient claims the payments as taxable income on their personal income tax return. For nonconforming states, the treatment of alimony payments would remain as it had been prior to tax reform. For partially conforming states, please research changes to alimony treatment prior to advising your client.
As your client’s trusted adviser, you can help them navigate the tax side of their divorce agreements before the end of 2018, since they will no longer have the same options in 2019 when the TCJA takes effect.
Editors note: This article was updated on Dec. 10, 2018, to clarify information about federal tax law vs. state conformity.