If you are divorced, divorcing, or otherwise involved in family court, Trump’s new tax plan may impact you. The two biggest changes involve alimony and personal exemptions.
Previously, alimony was tax deductible to the alimony payor and taxable as income to the alimony recipient. This allowed for many creative settlements where the parties could keep money in the family rather than giving it to the government. An alimony payor, who was almost always in a different tax bracket than the recipient, could lower his or her tax obligation by paying alimony to the recipient, who had to pay taxes on the alimony but at a much lower tax rate.
For divorces effective or modified after December 31, 2018, the new tax plan removes this tax quality from alimony and instead treats alimony like child support, a transfer of money from one party to another without tax consequences. We anticipate that we will see a rush of divorces expedited so that their alimony provisions are not impacted by the new tax plan. We may also see some modifications after December 31, 2018 by recipients who want their alimony recalculated and not taxable.
It is possible that our legislature will need to contemplate alimony once again. The recent Alimony Reform Act provided a formula for alimony calculations back when alimony was taxable. Now that alimony is no longer taxable, perhaps the formula will be revised.
It used to be that parties would negotiate who could claim the personal exemptions for their children. However, the new tax plan removes the personal exemptions and instead increases the standard deductions. This leaves the child tax credit remaining, which increased per qualifying child and which also requires the child to live with the claiming parent more than 50% of the time.
We now find ourselves with fewer pieces of the pie, so to speak, to negotiate and trade. If alimony is no longer taxable and personal exemptions are no longer available, we have fewer pieces to exchange and negotiate into a satisfying settlement agreement.