Should You Rush to the Finish Line?

Stacy D. Phillips and Michelle Piscopo

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.

If you are the party receiving alimony, you might initially think it’s a good idea to wait to finalize your divorce because you won’t have to pay taxes on the alimony payments. Think again. If the tax liability remains with the party earning the income, his or her net income will be lower which translates to a lower alimony payment. While you will avoid tax liability for the payments, the reality is that the amount of alimony you receive will likely be lower than the amount you would have netted if you received the larger payment and paid the taxes on it.

Parties that are in a position to resolve their divorce cases before the end of the year should certainly try to do so in order to take advantage of the alimony deduction. However, if you are not in a position to finalize your divorce, but you have a temporary support order in place, don’t panic. You still have the option of opting out of the TCJA provision when the final order is entered.

Ch-ch-ch-Changes! Preparing for Trump’s Tax Code Reforms

Michelle Piscopo and Mary Vidas

Donald Trump was sworn in as our country’s 45th President on January 20 and, prior to his inauguration, he vowed to immediately set into motion many of the promises he made during his campaign. One of the promises made by President Trump during his campaign was to reduce taxes across the board—especially for working class and middle class Americans.

Currently, there are seven different individual tax brackets ranging from 10% to a maximum of 39.6%. Under the plan proposed by President Trump, there would only be three tax brackets:

  • 12% for individuals earning less than $75,000;
  • 25% for individuals earning more than $75,000 but less than $225,000; and
  • 33% for individuals earning more than $225,000

President Trump’s plan also proposes raising the standard deduction from $6,350 to $12,000 for single tax filers and from $12,700 to $30,000 for joint tax filers, and eliminating the head of household tax filing status. Under President Trump’s plan, the corporate tax rate would be reduced from 35% to 15%.  While Trump alone cannot change the tax code, the proposal put forth by House Republicans is quite similar to the Trump proposal. The House Republican plan agrees with Trump’s three tax brackets—so changes in tax rates are inevitable.

How will this impact you?

Lower taxes means higher net income. And, that higher net income could impact you if you are paying or receiving child support, spousal support, maintenance, or alimony. For example, under the current tax code, an individual who earns $500,000 per year would be in the 39.6% tax bracket, which results in net income of $302,000. Under President Trump’s proposal, an individual who earns $500,000 would be in the 33% tax bracket, which results in net income of $335,000. That additional $33,000 of net income will impact your support calculation. Depending on whether you are the party receiving support or the party paying support, this could be good news or bad news. We expect quick changes from the new administration and are keeping a close eye on any changes to the tax code. As this issue develops, if you have any questions about how new tax laws could affect your support order, the attorneys in all states of our matrimonial group are prepared to answer them.