April 13, 2021

Tax Cuts and Jobs Act: Impact on Divorcing Spouses

Andrew M. Wilkes

As many of us move forward following the conclusion of this year’s tax season, many individuals and professionals continue to adjust to the major tax revisions approved by Congress in the Tax Cuts and Jobs Act of 2017 (TCJA) and signed into law by the President. The TCJA went into effect on January 1, 2018 and made substantial changes to the prior tax code.  Additional changes that impact divorce and separation instruments will occur beginning in 2019.  

One of the more publicized changes to the tax code relates to the tax treatment of alimony (spousal support).  Alimony (as defined in IRC Section 71) is not part of every divorce in Georgia, but is frequently awarded or agreed upon for purposes of providing support and maintenance to a former spouse.  Recent tax data reveals that approximately 600,000 Americans claimed alimony in their tax returns.   The revisions to the tax code relating to the treatment of alimony will have a material impact on the manner in which financial issues are negotiated and resolved attendant to a divorce 

Prior to the TCJA, payments meeting the definition of alimony were deductible from the gross income of the payor spouse and includible in the gross income of the recipient spouse.  Under the TCJA, alimony payments will no longer be deductible from the gross income of the payor spouse or includible in the gross income of the recipient spouse for divorce or separation instruments executed after December 31, 2018.   If the divorce or separation instrument is in effect before December 31, 2018, the tax treatment of alimony remains the same as it was before the enactment of the TCJA.  The elimination of the “alimony deduction” may have a far-reaching effect on all financial issues that have to be decided attendant to a divorce, including child support and property division.  

The tax changes present new challenges for divorcing spouses (and their lawyers) trying to plan for their future financial security.  The potential impact of the alimony changes can be illustrated as follows:  Under the pre-TCJA law, the wife earns $500,000 per year and is in the top tax bracket.  She is paying her husband $100,000 a year in alimony.  After deduction from her gross income, the $100,000 in alimony only costs her roughly $50,000.  Her husband will receive $100,000, but nets approximately $75,000 after taxes (assuming the husband is in a lower tax bracket).  Under the TCJA, the wife will argue that she can only afford $50,000 (the after-tax benefit cost to her under the previous tax code), and the husband would receive $25,000 less than the $75,000 under the previous tax code.

Additional regulations that impact the treatment of or further expand on alimony issues may be promulgated later this year with forthcoming clarifications by the IRS.  

Other notable changes under the TCJA include changes to the Child Tax Credit.  Under the previous law, the child tax credit provided for a partially refundable $1,000 child tax credit for the first two children with income phase-out at $110,000 for married or joint filers.  Under TCJA, the tax credit increases to $2,000 for “qualifying children” (generally under age 17 at the end of the year).  The income phase-outs were increased to $400,000 for married or joint filers. 

529 savings plan accounts also became more flexible.  Under the previous tax code, the distributions were allowed only for qualified higher education (college). Under TCJA, distributions of up to $10,000 per student are allowed for tuition at public, private, or religious elementary or secondary schools.  These changes may impact child support and property allocation issues attendant to divorce.

For most divorce cases involving alimony, there will be an incentive to get divorce matters resolved before the close of 2018.  Likewise, although already a common practice amongst divorce lawyers, consultation with a qualified tax professional incident to a divorce becomes even more important given the new landscape that exists under the TCJA.

Andrew M. Wilkes is a partner in the litigation section of Oliver Maner LLP and concentrates his practice in the areas of medical malpractice defense and family law/divorce. He can be reached by email at dwilkes@olivermaner.com and by phone at 912.236.3311.

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