The ink is barely dry on the “Tax Cuts and Jobs Act” which both houses of Congress passed on Dec. 20, 2017, yet, accountants are scrambling to figure out how the 500-page law will affect their clients this year.
Most can’t believe this complicated and confusing law is effective immediately. “We don’t have a year to figure it out,” said one notable tax expert. And some are warning the new law could change “the financial consequences of major life decisions for millions of Americans.”
As I and my tax accountant sort through the changes in this new law, I have discovered a new regulation that very well may affect the divorce strategies of my clients in 2018. In fact, if you are considering divorce, you may want to do your homework on how this new tax law could affect you.
One change in the tax law may impact couples who are eyeing contractual alimony or spousal maintenance as part of their settlement agreement. Under the new law, divorced taxpayers who pay contractual alimony or spousal maintenance would no longer be able to deduct those payments from their income. And recipients of this alimony would also no longer need to report the money as income. However, this only applies to divorces finalized after Dec. 31, 2018. So, depending on whether you are set to pay or receive contractual alimony/maintenance, you may want to speed up or slow down your divorce proceedings.
To clarify, Texas law does not provide for “alimony” in its commonly understood form, except in cases that are technically contractual alimony. Contractual alimony is a separate legal agreement between divorcing spouses where one spouse agrees via a contract to provide a stream of income to the other for a designated amount over a specified time-frame.
Spousal maintenance or spousal support, as it is called in Texas, has very stringent qualification requirements. The vast majority of my clients do not qualify for this support. However, if a spouse does qualify for spousal maintenance, under current tax regulations, these payments must be reported as income to the IRS, if their divorce decree provides that the payments are deductible. The decree can also require that payments be non-deductible and non-taxable. There are pros and cons to both of these arrangements depending on each couple’s situation.
If all of this is making your head spin, you are not alone. Bottom-line here, the current tax regulations described above go away for 2019. So, be sure to discuss this new law with your Certified Divorce Financial Analyst, tax accountant or divorce attorney to determine your course of action if divorce is in your near future.