Should You Rush to the Finish Line?
With news that the alimony deduction will expire at the end of this year, many clients are asking if they should rush to finalize their divorce. The answer to that question is, it depends.
The 2017 Tax Cuts and Jobs Act (the “TCJA”) made sweeping changes to the tax code and one of the most unexpected was the elimination of the alimony deduction. The alimony deduction had been part of the Internal Revenue Code for the last 75 years and allowed the higher income spouse to shift part of the tax liability on his/her income to the lower income spouse. This shifting of tax responsibility resulted in more after-tax income to allocate between the two households.
Under the TCJA, for any divorce or separation agreements or court orders entered into after December 31, 2018, the party paying alimony will no longer receive a deduction and the party receiving alimony will no longer have to report it as income. For divorce or separation agreements or court orders that are modified after December 31, 2018, the alimony deduction will not be allowed unless the modification expressly states that the TCJA does not apply. There is concern that, without the alimony tax deduction, there will be less incentive for the higher income spouse to pay alimony at a rate that will enable the lower income spouse to support his/her own household.
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