New tax issues in future Texas alimony awards

DISCLAIMER: The Firm does not give tax advice. If you have specific tax-related questions, please consult your tax advisor. The following information is provided for informational purposes only and does not constitute tax advice.

The federal tax overhaul may have real consequences for alimony levels.

The recent federal tax overhaul made the news for many reasons, but perhaps one discussed less often in the media is a major change to the way alimony payments will be treated, beginning with alimony paid pursuant to alimony agreements and divorces entered into after December 31, 2018. For those families, the Tax Cuts and Jobs Act will change the tax treatment of alimony for the first time in 75 years.

For these many years, alimony paid has been deductible on the paying ex-spouse's federal tax return, reducing the overall taxes owed, sometimes significantly. On the flip side, ex-spouses who receive alimony have been required to include the gain as part of taxable income.

Change in treatment

Beginning with alimony agreements and divorces finalized after December 31, 2018, alimony payments will no longer be deductible. For recipients, alimony payments will no longer be considered part of taxable income.

The historical tax treatment of alimony has generally made negotiation between divorcing spouses easier because the paying party knows that even a generous alimony commitment will be more financially viable because of the tax deductibility. Commentators in the media have been speculating that the new tax law may make supporting spouses more cautious to agree to pay alimony, since it will be more expensive in the long run than it has been for decades.

While it seems positive for recipients that alimony will no longer be taxable income, many experts speculate that the downward pressure on award levels from the change in deductibility may potentially cancel out the benefit of nontaxability in many situations.

There may just be a smaller pot of money for the divorcing spouses to spread around between the two new households than there would have been under the previous tax scheme. Not only will the payments no longer be deductible, but also the loss of this deduction may put some potential payors into a higher tax bracket.

Talk to a Texas divorce attorney

To be clear, this change will not impact existing divorce or alimony agreements or those finalized during calendar year 2018. However, anyone who goes back to modify alimony arrangements after 2018 may explicitly choose to opt in to the new tax treatment in the new agreement or order, if they desire.

Whether it is advantageous to finalize an alimony agreement or get a contested divorce closed during 2018 before the new tax scheme kicks in is an important question for an experienced divorce lawyer and a tax advisor. The answer may not be entirely clear and there may be pros and cons to weigh, depending on the individual circumstances and on whether you the person is the potential recipient or the one providing support through alimony.

Anyone facing this issue should seek legal advice immediately since as of this writing it is almost half way through 2018.

The Dallas attorneys at The Webb Family Law Firm, P.C., represent Texans in divorce and related matters throughout the Metroplex and throughout the state.