There has been no shortage of discussion of the Tax Cuts and Jobs Act passed this past year. For many, the tax law involved an immediate increase in their take home pay. But, there were many provisions of this law that were not discussed completely and the effects are not yet fully known.
One of the provisions that takes full effect on January 1, 2019 is the change in treatment of alimony, or, as it is called in Texas, spousal maintenance. Prior to January 1, 2019, alimony has typically been a deduction for the person paying it and taxable to the person receiving it. On January 1, 2019 this deduction will be eliminated.
The deduction for alimony (or domestic support obligations) has existed for many years. The tax treatment for alimony is often an issue in many divorce cases. The deductibility of the payments for the payor frequently made the payments more affordable to the payor while not overly penalizing the less moneyed recipient because the monies would be taxed at the lower marginal rate of the recipient.
Additionally, alimony has existed for long enough now that it is addressed in many pre-nuptial agreements. We do not know yet how the new tax law will treat alimony contemplated under pre-nuptial agreements (essentially contracts) entered into prior to the new tax laws. Additionally, in Texas (and probably other states), there are two types of alimony. Some alimony is post divorce maintenance covered by Chapter 8 of the Texas Family Code, and other alimony is contractual.
Over the years some have disguised property settlement as alimony due to the tax treatment of alimony. Although the IRS rules do not permit this, it likely still happens. “Clever lawyers” that skirt the tax rules that prohibit the use of alimony to get favorable tax treatment of property settlements was one of the concerns that led to the elimination of the alimony deduction.
It is not an exaggeration to say it is a brave new world with regard to post divorce maintenance or alimony. It will likely be a few years until the full effect of the new tax legislation is seen. One thing is certain, now more than ever, it is a good idea to seek the assistance of a qualified attorney who practices family law.
