Under the new Tax Cuts and Job Act (TCJA) rules which are in effect until 2025, the “above-the-line” deduction for alimony and separate maintenance payments was repealed, making these payments nontaxable to the recipient and therefore, non-deductible to the payee.
Divorce instruments executed prior to 2019 are grandfathered and alimony under these agreements will follow the prior rules. Unless the agreement executed before December 31, 2018, is modified after December 31, 2018, and the modification expressly provides that the amendments made by the TCJA apply to the modification. This change has significant impacts.
No longer can you strategically help equalize a settlement by shifting income from a high wage-earning spouse to a lower earning spouse. Those who have dependent children and qualify to file as Head of Household still benefit with the new tax rates over filing Single, and either filing status qualifies for the increased Child Tax Credit of $2,000 per qualifying child if modified AGI is under $200,000. Also, with the elimination of the itemized deduction for miscellaneous expenses, the potential for attorney fees to be deducted is eliminated.
Although the Personal Deduction for a dependent was eliminated, the same framework to identify who could claim the exemption is still used to determine which parent can claim the child tax credit and college credits unless it’s negotiated differently in the divorce process and outlined in the final decree. Note the custodial parent can waive their right to the child credit or college credit by giving the noncustodial parent these benefits with a signed Form 8332.
The effects of these provisions, while done to generate additional revenue for the government, will have a ripple effect. States will have to adjust their child support tables and procedures. Fewer spouses will be willing to pay alimony, preferring to instead to deal with income inequity through nontaxable property settlements. Battles for custody to claim the child-related credits will ensue.