Major changes for individual taxpayers were implemented under the Tax Cuts and Jobs Act (TCJA). One modification that will impact divorce settlements executed after December 31, 2018 is the elimination of the alimony deduction. Additionally, post 2018 agreements will not require the recipient to report the payments as income.
Although many other provisions will expire in 2025, this new rule is permanent in the tax code. Divorce agreements executed before January 1, 2019 will not be impacted by this change in the law, unless a modification is made specifically that TCJA treatment applies. Some states, including California, require a six-month waiting period after the papers are finalized for a divorce to take effect. In those states, the agreement would need to be signed before the end of June for the taxpayer to get the alimony deduction.
In addition, the tax law change to alimony is likely to impact the dynamics at the bargaining table. As a result, consider the following:
- A lump sum payment can be negotiated by December 31, 2018.
- Agreements executed in 2019 and later could create a longer negotiation period and lower alimony amounts.
If you or someone you know is in the process of a divorce or previously executed an agreement, we recommend contacting your tax advisor sooner than later to:
- Review your current and future tax implications.
- Determine if it makes sense to modify prior agreements.
- Understand the rules and waiting period of your home state.
We hope you find this information valuable. If you have any questions, please contact us.