Big Changes to Alimony Law Beginning 2019
If your divorce was final before the end of 2018, meaning that the decree was signed by the judge and filed with the court by the end of December 31, 2018, then your alimony payments are treated the “old way.” Payments are a deduction to the one paying, and taxable income to the one receiving. But for post-2018 divorces and modification actions, the world of alimony has drastically changed.
Beginning in 2019, the new Tax Cuts and Jobs Act (TCJA) takes effect.
Under the TCJA, the paying spouse no longer gets the deduction, and the receiving spouse no longer has to declare the money as income. So, effectively, the cost of paying alimony has gone up.
Let me illustrate. Suppose you earn $250,000.00 per year and pay $50,000.00 in alimony. Under the old law, since you didn’t have to pay tax on the money, it would cost you a bit more than $25,000.00 to pay the $50,000.00 to your ex-spouse. So, there was an incentive to pay high alimony if one was in the higher tax bracket and had a spouse in the lower tax bracket. Under the new law, you pay with after-tax money. So, now you have to ask yourself how much you would have to earn to generate the same $50,000.00 for your ex. It will be closer to $100,000.
I have been asking some of our experts what they think will happen with this. It will take some time to see how attorneys and judges consider the new law in the way alimony is awarded. My guess is that judges will take into consideration the cost of funds.
In our practice, we will be using Certified Financial Planners and CPA’s to run different creative scenarios for our high-asset clients who are divorcing. We will have to use more collaborative means to maximize, or at least, optimize the asset and debt division so that dividing the marital estate costs the paying spouse the least, while giving the receiving spouse the most benefit.
Here is one creative idea that has been put out there. If you have a retirement account, that retirement account is a way of sheltering some income from current taxes. It might make sense to use a portion of existing retirement accounts to fund the alimony you would otherwise pay in monthly installments to a lower-earning ex-spouse. Here is the idea: Suppose you are looking at paying $100,000.00 in alimony over a 5-year period. Beginning in 2019, you would have to pay all of that that as after-tax income! But suppose you transferred $100,000.00 from a retirement account to your ex. She or he would pay 10% plus their rate on income as they withdraw the funds. It would be a tax-free transfer to you. You could then put the money that you otherwise would have used for paying the alimony into a retirement account. Of course, you would have to ask your CFP or CPA to tell you the maximum you are allowed to shelter per year and run scenarios to find your best solution.
If you have a pre-nuptial contract that has alimony provisions set out, you need to get your pre-nup reviewed to see if you want to change those provisions.
I will keep all of you posted as new ideas come my way, and, as always, please feel free to share with me at emily@brennerlawgroup.com. All comments will be kept confidential.