Know the Law: Will the New Tax Laws Make Divorce Settlement More Difficult?

Beth L. Fowler
Counsel, Tax Department
Photo of Jacqueline Leary
Jacqueline A. Leary
Associate, Litigation Department
Published: Union Leader
June 9, 2019

Q: I am thinking about getting a divorce. Will the new tax laws make settlement more difficult?

A: Likely, yes. It is the end of the first quarter of 2019, and the 2017 changes to the Internal Revenue Code concerning divorce payments are in full swing.

It has been widely publicized that for divorces finalized after Dec. 31, 2018, the revised code makes alimony not deductible by the payer and not taxable to the recipient. It does so by removing alimony from Code §61(a) definition of gross income, deleting §71 that included alimony in gross income, and eliminating §215 that provided for the deduction of payments that qualified as alimony under §71.

The code revision benefits the alimony recipient because he or she will no longer pay tax on alimony received. This means that the recipient will have the use of the full amount of each alimony payment. However, because alimony payments are no longer deductible from gross income, the paying spouse will likely want to pay less alimony. If the paying spouse successfully argues for smaller alimony, the recipient spouse might end up with less money in hand despite no longer being taxed on the alimony received.

Because the recipient spouse is usually the lower wage earner, the tax savings to him or her will likely be less than the lost tax benefit to the payer spouse. This may make settlement more complicated by providing additional incentive to the higher earning spouse to minimize alimony. Because property settlement payments are treated in the same manner, we may see a trend towards larger property payments with reduced alimony payments. The code changes may also lead to solutions that are more creative. For example, the higher-income spouse might agree to payment of a larger percentage of his or her retirement accounts to “share” the tax burden more equitably.

When seeking a modification of alimony payments, pay careful attention to the language in the decree or agreement. If the language states that the revised code governs, the new treatment of alimony will apply. However, if the language regarding modification is silent, the old law modifications may apply. If the language regarding modification provides that the old law still applies, then it may. Since the IRS has not yet issued regulations regarding the law that applies to modifications, uncertainty exists as to what law will be applied post-modification.

Since regulations with regard to these revisions to the code have not yet issued exactly how they will impact alimony, negotiations are uncertain, but it is clear they will have an impact.

Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association. We invite your questions of business law. Questions and ideas for future columns should be addressed to: McLane Middleton, 900 Elm St., Manchester, NH 03101 or emailed to Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.