April 15th has been tax day since 1955 and for almost as many decades, divorced couples with alimony obligations have had the same tax situation – those paying could deduct payments dollar for dollar and those collecting would claim it as income. But for the first time ever, those rules have changed this tax season, bringing on a new era of both divorce negotiations and tax preparations for the newly divorced.
For divorces entered after January 1, 2019, the tables have turned on the tax law in that alimony payments – for both sides – are no longer taxed. That means those receiving payments, who are typically in lower income brackets, won’t be affected tax wise. It’s just money coming in. Good news for them.
The bigger impact is for those who pay. They can no longer use alimony payments as a tax break to reduce overall income and perhaps lower their tax bracket, or at least lessen their tax obligations overall. It’s just money going out. This represents a huge difference in how divorce negotiations will move forward. (NOTE: Payments of alimony implemented before January 1, 2019 are not affected and remain tax deductible.)
In the past, attorneys could “do the math” for clients to help them understand the balance of their alimony payments vs. tax benefits. It gave attorneys “wiggle” room to negotiate a number that almost leveled out things out for the payor. With the new laws, that wiggle room is completely deleted – it’s straight dollars coming out of the payor’s pockets and changes the negotiation game.
What’s more, the government has yet to share specific guidance on this piece of the new tax law, so for now, even local judges admit that a lot will be left up to interpretation when settling cases. So as 2019 unfolds, and the first cases are settled, divorce attorneys, accountants, and clients alike will learn more and more on how to negotiate under this new tax era.
Robert Adinolfi, Esq. is the founding partner and shareholder of Adinolfi, Molotsky, Burick & Falkenstein, PA. He has over four decades of experience dealing with all aspects of divorce and family law. If you are facing a divorce and the prospect of paying or receiving alimony, it is very important to retain an attorney who understands the financial aspects of your case. Call our Haddonfield office today to schedule an initial consultation to find out how the new tax laws will impact your life.