How Will Tax Reform Under the Tax Cuts and Jobs Act Affect Your Divorce?

Enacted on December 22, 2017, the federal Tax Cuts and Jobs Act made sweeping changes to the Internal Revenue Code. But, among the many changes, there is one in particular that is noteworthy for spouses who are currently contemplating a divorce: For the first time in over 75 years, the rules regarding tax treatment of spousal support (or “alimony”) are changing – and they are changing dramatically.

Tax Cuts and Jobs Act Reverses Tax Treatment for Spousal Support

Under the outgoing version of the Internal Revenue Code, spousal support payments are deductible by the payor, and they are treated as taxable income of the recipient. This has allowed divorcing spouses with significant earning power to mitigate the financial consequences of getting divorced; and, since spousal support is intended as essentially an income substitute for spouses who forewent career opportunities during their marriage, this tax treatment has always fundamentally made sense.

But, under the Tax Cuts and Jobs Act, the tax treatment of spousal support is being reversed: The payor deduction is going away, and the recipient will no longer be required to report spousal support as ordinary income. This means that the tax treatment of spousal support will now more closely-resemble that for child support, and it also means that divorcing spouses now have a host of new considerations to keep in mind.

Spousal Support Changes Only Affect Divorces Finalized After December 31, 2018

The spousal support provisions of the Tax Cuts and Jobs Act only affect divorces finalized after December 31, 2018. So, if you are currently going through a divorce, it may still be possible to receive the prior tax treatment for divorce settlement. But, since California has a six-month waiting period for getting divorced, if you live in the North County area and you have not yet initiated the divorce process, you will need to address the effects of the Tax Cuts and Jobs Act during your divorce.

To be clear, this means that all divorces finalized during 2018 or prior will be grandfathered under the pre-Tax Cuts and Jobs Act spousal support rules. Even if you modify the terms of your spousal support arrangement after 2018, you will retain the prior tax treatment unless you specifically opt for the new law to apply.

What Does the Tax Cuts and Jobs Act Mean for Your Divorce?

So, what does the Tax Cuts and Jobs Act mean for your divorce? With regard to spousal support, it means nothing if you are able to obtain a court order dissolving your marriage prior to the end of 2018. If you are currently going through the divorce process, you will need to assess whether this is a realistic possibility, and you may want to consider mediation, arbitration, or collaborative law in order to speed up the resolution process. Of course, if the new tax regime is advantageous to you, this is something that you may want to consider as you work through the process as well.

If you file for divorce in California after June 1, 2018, your only option will be to confront the implications of the Tax Cuts and Jobs Act head-on. To ensure that you clearly understand the impacts of the new law and make decisions with your long-term best interests in mind, it will be important to work with an experienced divorce attorney.

Request a Confidential Consultation at the Law Office of Renkin & Associates

If you have questions about how the Tax Cuts and Jobs Act will impact your divorce, we invite you to contact us for a confidential consultation. To request an appointment with North County Certified Family Law Specialist Richard M. Renkin, please call (888) 837-3564 or inquire online today.