While a divorce can be difficult, the passing of the recent tax bill could make the process even more challenging to navigate in the near future. When the Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, it brought alimony and maintenance payments changes. As of 2019, payors can no longer deduct alimony and maintenance payments, and such payments are no longer taxable to the recipient.
The Previous Law
As part of a divorce agreement, the higher-earning spouse makes alimony and maintenance payments to the lower-earning spouse. These payments are intended to make up for economic hardship suffered by the lower-earning spouse due to the divorce. The spouses or their attorneys usually negotiate the amount of the alimony payment during the divorce proceedings.
Under the previous tax plan, these alimony and maintenance payments were tax-deductible. The higher-earning spouse received a tax break on the alimony paid to the lower-earning spouse, which provided an incentive for the higher-earning spouse to cooperate. Furthermore, the lower-earning spouse, who typically fell into a lower income tax bracket, paid lower tax rates on the alimony they received. As a result, both parties shared this tax benefit, which encouraged many prompt and fair settlement agreements.
No More Tax Breaks Under TCJA
Under the new tax law, both provisions have been eliminated. The payor can no longer deduct alimony and maintenance payments so that divorce proceedings may become tense and costly. However, this rule does not take effect immediately; only those who start paying alimony after January 1, 2019, will need to adhere to this updated law. This means that anyone who goes through a divorce in the next year will still write off these payments.
Since couples who are divorcing in 2019 and beyond will not take deductions, critics fear there may be less incentive for the higher-earning spouse to provide as much support to the lower-earning spouse. In particular, less wealthy separating couples may feel these changes the most. Randy Kessler, a family law attorney, recently told MarketWatch, “The deduction, as it stands, is a great motivator to encourage the higher wage earner to agree to help support the spouse with less income.”
The Long-Term Impact
Although we still have almost a full year before this change occurs, it is important to understand how this might impact couples who seek to divorce in the near future.
If you have questions about alimony and maintenance payments, contact an experienced Oregon divorce attorney. Lee Tyler Family Law, P.C. will help you plan the pathway through your divorce and build a strategy for getting there. For more information on Portland divorce counsel, contact Lee Tyler Family Law, P.C. today at (503) 233-8868.