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How the New Tax Laws Affect Alimony and Divorce Negotiations

The new tax code as it pertains to alimony takes affect January 1, 2019. The new law applies to any divorce instruments finalized after 2018. The divorce instruments include:

  • Divorce Decree
  • Separation Agreement
  • An agreement or order requiring a spouse to make payments for support or maintenance of the other spouse
  • Any other written agreement that is required under the internal revenue code

Tax ramifications of alimony payments have long been used as a negotiating tool when trying to finalize equitable distribution during a divorce. The elimination of the tax deduction from the payer will greatly affect how divorces are negotiated in the future and also raise many questions on how to apply the new tax code.

After January 1, 2019, some of the changes will be as follows:

  • There will no longer be a need to allocate child support and alimony in a support order.
  • Spousal support will no longer be required to be included in income calculations when determining child support.
  • Alimony will no longer be counted as income when contributing to an IRA.
  • Lower income recipients will still be eligible to the earned income tax credit since Alimony is no longer counted as income to the recipient.

One of the problems facing the courts is that the tax burden is already built into the support calculations because of the shifting tax burden when alimony was treated as income to the payee spouse. Courts should be in the process of recalculating the support guidelines taking out the tax deduction for the payer and the tax obligation for the payee spouse.

Another issue is whether a modification of a support or alimony order (if permissible) after January 1, 2019 will alter the support award that was in place prior to January 1, 2019. The law is not clear on the effect of a modification at this time.

The payee spouse would much rather try to finalize the divorce in 2018 to keep the tax deduction whereas the recipient spouse would rather wait to come to any final agreement or order after January 1, 2019. As of now, this portion of the tax law is to expire in 2026, which is also another consideration if alimony is to be paid in excess of eight years.

Attorneys and clients alike need to re evaluate their financial positions, financial needs in the future, and equitable distribution strategies to take into account these new changes to the tax laws prior to and after January 1, 2019 to ensure they are in the best position possible to move on with their lives post divorce.

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A couple can come to their own agreement about property settlement, which the court will generally accept. The Pennsylvania court will decide if either spouse is entitled to alimony, based on age, physical and mental condition, earning potential, duration of the marriage and standard of living. The court decides the duration of alimony, but support ends automatically if the one receiving it remarries or cohabits.
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