When President Trump signed the Tax Cuts and Jobs Act into law on December 22, several aspects of the federal tax code changed significantly. For spouses contemplating divorce, one of the most sweeping changes is a reversal of the tax treatment for spousal support (commonly referred to as “alimony”).

The Current Tax Rules for Alimony (Pre-Tax Cuts and Jobs Act)

Under the current version of the Internal Revenue Code, alimony payments are deductible by the paying spouse, and they must be reported as taxable income by the recipient. This rule has been in place for decades, and it has been a key principle underlying many couples’ use of alimony payments to structure the overall financial distribution of their divorce. With significant flexibility to divide community property and structure alimony payments consistent with Texas law, the current tax treatment of spousal support affords opportunities for a variety of creative and mutually-beneficial settlement options.

The New Alimony Tax Rules Under the Tax Cuts and Jobs Act

Under the Tax Cuts and Jobs Act, the federal tax treatment of alimony is reversed: The deduction for alimony payors is gone, and recipients will no longer need to report their spousal support payments as income to the IRS. So, whereas high-earning spouses once had a financial incentive to agree to alimony (assuming the overall structuring of their divorce resulted in a net tax benefit), the new law will eliminate this incentive in many cases.

The change is anticipated to generate an additional $6.9 billion in tax revenue over the next 10 years, meaning that former spouses are expected to pay more in taxes than they would have under the outgoing law. This is largely due to the fact that alimony payors are typically in a higher tax bracket than alimony recipients, so payors will be paying more tax than their former spouses would have paid under the existing provisions of the Internal Revenue Code.

Alimony and Tax Considerations for Spouses Contemplating Divorce

What does this mean for your divorce? In short, it depends. While the new law represents a major shift in tax policy, many divorcing spouses will still have options available for mitigating their tax liability.

Additionally, while many aspects of the Tax Cuts and Jobs Act are effective for 2018, the new alimony rules only apply to divorces commenced after December 31, 2018. The new law will not affect former spouses who have already finalized their divorces, or those who file before the end of the year. As a result, spouses who are considering divorce should carefully weigh the potential tax implications of delaying their divorce past the end of 2018 – as the new law will have potential benefits and drawbacks for spouses in varying circumstances.

Speak with a McKinney Divorce Lawyer at Nordhaus Walpole, PLLC

If you are thinking about filing for divorce in 2018 and would like more information about how the Tax Cuts and Jobs Act could impact your post-divorce finances, you can contact our offices for a free consultation. To speak with one of our McKinney divorce lawyers in confidence, please call (214) 726-1450 or request an appointment online today.