♪♫ BYE, BYE TAX DEDUCTIBLE ALIMONY, MY GOOD FRIEND ♪♫

December 26, 2017

Alimony was a good friend to both parties in a divorce.  Dependent spouses receiving alimony were obviously happy to receive a stream of income during and after divorce, enabling them to regain firm footing in their financial lives.  Yes, dependent spouses had to declare these payments as income on their tax returns, but the benefits of these payments outweighed the tax consequences.  On the other side, while not happy that these dollars were hurdling out of their pockets to the ex-spouses, payor spouses were happy that those payments were deductible, thereby reducing the amount of taxes paid at the end of the year.  It was a rare win/win moment in a divorce situation – and just like that – it is gone.

Under Section 11051 of the Tax Cuts and Jobs Act approved by Congress on December 20, 2017, to be signed into law by the President in January 2018, alimony will no longer be deductible for the payor, nor will it be considered income for payee.  If you are currently a payor, don’t panic and congratulations, because this does not apply to you!  This new law applies only to those who divorce or who have entered into separation agreements after December 31, 2018.  This new law will not affect anyone already paying or receiving alimony, even if there is a modification of an existing order after December 31, 2018.  As such, divorcing spouses will have all of 2018 to enter into divorce agreements and/or receive court decisions that include tax-deductible alimony.  Surely, there will be a rush to get divorce cases completed in 2018 to take advantage of the benefit of the current alimony tax structure while this tool still remains in the lawyers’ tool box for settlement negotiation purposes.

However, as of January 1, 2019, payees can celebrate receiving alimony[1] free from any tax responsibility… if they can get it!  Payors will now have additional emotional and financial angst because they will be sending payments to the ex-spouse, but their income tax liability will be much higher without the alimony deduction.  This is a recipe for more animosity between the parties.  The landscape of divorce settlement negotiations and the framework of Court decisions will undoubtedly change under this new law.  The tax deductibility of alimony has facilitated the financial support of spouses for decades.  Now, there will be no more incentive for making alimony a part of any settlement or court decision, especially when alimony is already a secondary remedy under Pennsylvania law.  Alimony will be a less attractive option during settlement negotiations. Courts may still award alimony but, may be more inclined, when possible, to instead award the dependent spouse a larger percentage of the marital estate or make the alimony payment period shorter to reduce the burden on the payor or to sever ties between the parties more quickly.

Only time will reveal the societal and legal impact of this new law, and SMGG is here to help advise you on how to navigate through this new landscape.

At Strassburger McKenna Gutnick & Gefsky, our lawyers are experienced and skilled in determining the type of divorce to pursue, what relief to seek, and the tactical and strategic analysis required to make these decisions. For questions, contact Chrystal Tinstman at ctintsman@smgglaw.com or (412) 281-5423.

[1] Spousal support, alimony pendente lite and alimony after divorce