The tax changes and divorce

The 2017 changes to the Internal Revenue Code concerning divorce payments are in full swing. If you are considering divorce, you may want to seek advice from an attorney to understand how the changes might affect you.

Alimony

It has been widely publicized that, for divorces finalized after Dec. 31, 2018, the revised code makes alimony not deductible by the payor and not taxable to the recipient.

The revision benefits the alimony recipient because he or she will no longer pay tax on alimony received. This means that the recipient will have the use of the full amount of each alimony payment. However, because alimony payments are no longer deductible from gross income, the paying spouse will likely want to pay less alimony. If the paying spouse successfully argues for smaller alimony, the recipient spouse might end up with less money in hand despite no longer being taxed on the alimony received.

Because the recipient spouse is usually the lower-wage earner, the tax savings to him or her will likely be less than the lost tax benefit to the payor spouse. This may make settlement more complicated by providing additional incentive to the higher earning spouse to minimize alimony.

We may see a trend toward larger property payments with reduced alimony payments. The code changes may also lead to solutions that are more creative. For example, the higher-income spouse might agree to payment of a larger percentage of his or her retirement accounts to “share” the tax burden more equitably.

When seeking a modification of alimony payments, pay careful attention to the language in the decree or agreement. If the modification states that the revised code governs, the new treatment of alimony will apply. However, if the modification is silent, the old law may apply. If the modification provides that the old law still applies, then it may.

Since the IRS has not yet issued regulations regarding the law that applies to modifications, uncertainty exists as to what law will be applied post-modification.

Standard deduction and exemption

The changes to the Code created higher standard deductions:

• $12,000 for single filers (additional $1,500 if over 65 years old)

• $24,000 for joint filers

• $18,000 for head of household

At the same time, the revised code eliminates all personal exemptions, including those for dependents. Divorce decrees commonly address the ability of the divorcing spouses to claim a child as a dependent. While claiming a child no longer provides a taxpayer with an additional personal exemption, dependent status may still provide tax benefits. A taxpayer can only file under Head of Household status, with its increased standard deduction and lower tax rates, if the taxpayer provides a home to a person who qualifies as a dependent. Additionally, a taxpayer who has a dependent child may be able to claim a child tax credit for the child. Therefore, determining which parent can claim a child as a dependent will continue to be an important issue during divorce settlement negotiations.

Since regulations with regard to these revisions to the code have not yet issued exactly how they will impact alimony, negotiations are uncertain, but it is clear they will have an impact.

Jacqueline Botchman, a lawyer at McLane Middleton, is vice chair of the Family Law Practice Group. Beth Fowler is counsel for the firm’s Tax Department. They can be reached by email at jacqueline.botchman@mclane.com or beth.fowler@mclane.com.