Loss of alimony tax break could change divorce negotiations

Divorces are expected to get more contentious with the new tax law scrapping the alimony deduction.

The recent passing of the Tax Cuts and Jobs Act in Washington may not sound like it has much to do with family law, but buried in the act is an important change that could affect divorce negotiations throughout the country. As Fortune reports, the new law scraps the alimony tax credit, which has been used as an important negotiating tool in divorces for the last 75 years. The change, analysts say, will likely result in divorce negotiations that are more acrimonious and likelier to end up in court.

Alimony tax break scrapped

For more than seven decades, those who pay alimony (also called spousal support or spousal maintenance) were able to deduct those payments on their federal taxes. Those deductions were provided on the assumption that since those paying alimony wouldn't actually be able to keep that money, it wasn't fair that they should be forced to pay taxes on it. Recipients of alimony, meanwhile, were required to pay taxes on payments.

Congress' large tax reform law eliminates both the alimony tax deduction and the requirement that alimony recipients pay taxes on their payments. While the Tax Cuts and Jobs Act has already been signed into law, the provisions dealing with the alimony tax break will only apply to divorces beginning January 1, 2019.

What to expect with the changes

The changes to the alimony tax credit are controversial. Currently, the fact that the one paying alimony knows that he or she will eventually get a large portion of their payments back through tax deductions, that allows them to be more generous when negotiating a divorce settlement. With less cash available for alimony due to the deduction's elimination, however, analysts predict that divorce negotiations are likelier to become messier and more contentious.

Furthermore, as CNBC notes, many alimony guidelines rely partially on the tax code, meaning that those guidelines may need to be updated. It is also unclear how current prenuptial agreements that were drafted under the assumption that alimony would be tax deductible will be affected. Again, it seems likely that more of those agreements will be challenged on the basis that the terms in those agreements would not have been agreed to if the parties knew the alimony tax deduction would be eliminated.

Family law assistance

As stated above, to take advantage of the alimony tax deduction, divorce or separation proceedings must begin before January 1, 2019. Of course, nobody divorces in order to get a tax break, but for those who have already decided that their marriage is no longer working for them then the tax deduction is an important consideration in determining the timing of one's divorce. Anybody considering getting a divorce should talk to a family law attorney about their options, including what their rights are regarding spousal support and other important financial issues that often come up in divorce.