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New Tax Law will hurt Maintenance Payors/Recipients

Under the Tax Cuts and Jobs Act of 2017 (TCJA) there are some dramatic changes coming to maintenance or what some states refer to as alimony. 

Agreements executed in 2018 will retain the default of maintenance being deductible by the payor and included as taxable income to the recipient—which has been the case since 1942. However, for divorce agreements executed in 2019, payments between former spouses will no longer be tax deductible by the payor and included in the recipient’s gross income for tax purposes.

What if you have a pre-2019 order for maintenance or alimony? Those orders will continue to be tax deductible by the payor and included in the recipient’s gross income unless your agreement specifically says that the TCJA applies.

What does this mean for you? If you are in the situation of potentially having to pay maintenance, you need to get your divorce agreement signed and finalized in 2018 to take advantage of the current tax law. If you are receiving maintenance, you may want to wait until 2019 because maintenance payments will no longer be included in your income for tax purposes meaning there will be a significant tax savings to you if you wait to have your agreement finalized until 2019.  It also means that there will likely be a trend towards lump sum property settlements in lieu of maintenance in 2019 and beyond.

It also means that if you already have an order to receive maintenance under this new tax law you could negotiate with your former spouse for maintenance to no longer be taxed as ordinary income to you; meaning perhaps a tax savings for you. This is something you should consider if your former spouse earns a substantial income and derives very little tax benefit by deducting the maintenance paid to you.

One of the other substantial changes coming with the TCJA is that tax preparation, investment advisory fees, and legal fees incurred related to tax planning and to obtain taxable maintenance (alimony) are also gone. Gone will be the days when your attorney fees were at least partially tax deductible. The short answer to all of this is that if you would be paying maintenance then you need to get to work and get divorced before the end of 2018. If you will be receiving maintenance, then wait until 2019 and ask for a lump sum in lieu of maintenance.