Significant Changes to Taxability of Spousal Maintenance Imposed by the Tax Cuts and Jobs Act of 2017
Are you in the midst of a divorce proceeding, with the possibility of paying or receiving spousal maintenance? If so, you need to be aware of a significant change, under the new Tax Cuts and Jobs Act (TCJA), regarding the taxability of spousal maintenance payments.
Currently, payers of spousal maintenance are able to deduct the payment from their taxable income, and the recipient must report the payment as taxable income. Under the TCJA, for all divorce or separation agreements entered on or after January 1, 2019:
- anyone ordered to pay spousal maintenance will no longer be able to deduct the payments on his/her federal taxes, and
- the payment will no longer be treated as taxable income for the recipient.
This may make negotiating of settlements involving spousal maintenance more difficult, since the payer will no longer receive a tax benefit. Further, in some Arizona venues, there seems to be a trend toward more self-sufficiency and less recognized long-term awards of spousal maintenance. We believe this overall trend toward economic independence and lack of taxability may result in reduced awards of spousal maintenance in the years to come.
Remember, these changes do not go into effect until January 1, 2019. Depending on what side you are on (paying versus receiving), you may want to be sure your divorce is finalized by December 31, 2018 (so you are allowed a taxable deduction for the payments) or delay your divorce settlement until after January 1, 2019 (in order to receive tax-free payments).
If you are currently paying or receiving spousal maintenance under an existing decree or separation agreement, the new TCJA rules will not apply to you. The current rules regarding a taxable deduction for the payer and taxable income to the recipient will continue to govern your decree.
Additionally, if a decree or separation agreement is entered prior to December 31, 2018, and the agreement is legally modified on or after January 1, 2019, then the new rules will apply only to that modified decree, if the modification expressly provides that the TCJA rules are to apply.
As always, when dealing with any taxable situation you should check with your accountant or tax professional.
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