The new tax law makes many changes to the existing tax structure, but for our purposes we will only discuss the one which clearly impacts Berks County family law clients: the removal of the alimony deduction.
Alimony is a regular payment made to a spouse during the pendency of a divorce (alimony pendente lite) or a payment scheduled put in place after a divorce is finalized. Alimony can be part of a prenuptial agreement or a marriage settlement agreement or it can be ordered by a judge following a hearing. The purpose of both types of alimony is to place spouses on equal financial footing for some period of time. The amount of alimony pendente lite is generally determined by statutory guidelines, just as with child support. Alimony, on the other hand, is a discretionary award and the court uses statutory factors to determine the amount. The amount of time that alimony will be paid is also determined by the court. Some relevant factors considered by the court in determining amount and length of time for payments are length of marriage, earning capacity of each party, assets of each party and the degree to which one spouse has contributed to the education and career of the other spouse.
So, while there are a variety of factors that determine amount of alimony and alimony pendente lite awards, all payors and payees followed the same tax rules regarding these payments: recipients included the payments as income and payers could claim the money as a deduction. However, for all divorces commenced after December 31, 2018, these tax rules will cease to exist. The person paying alimony can no longer claim it as a deduction and the person receiving alimony will no longer need to include it as income. This change will not affect anyone with a current alimony award. This will bring the the tax rules for alimony in line with the rules for child support although the discretionary aspect of alimony prevents the two forms of support from being equal.
Some experts fear that the loss of a deduction for the person paying the alimony will lead to a reduction in agreed upon alimony awards. Only time will tell whether or not that is the case. However, this is certainly something that should be discussed with your divorce attorney and it will undoubtedly become a more pressing issue as the December 31, 2018, deadline gets closer.