There aren’t many experiences on this planet that can match the emotional drain of going through a divorce. After promising to love and cherish someone ‘til death, you’re shocked and saddened to somehow find yourself instead sitting across a richly stained conference table in the harsh glow of fluorescent lighting, wondering when and how it all went to pot. While you may be there prepared to go to war over the china and your accrued frequent flyer miles, you may want to saddle up for an even tougher and particularly straining conversation: alimony. *dun, dun, dun…*
Just because you’re going through a divorce doesn’t mean that you’ll end up paying alimony (or receiving it). But with the number of factors that go into considering who gets awarded and who has to pay alimony, it is an outcome you should prepare for, just in case. And in order to prepare, it’s important to first understand what exactly alimony is and the ways in which it will impact not only your bank statements, but your taxes for every year you have to pay it.
What is Alimony?
Alimony, sometimes referred to as “spousal support” or “maintenance”, is a legal obligation of one spouse to provide financial support to another spouse following a divorce. Alimony has been around for hundreds of years; at first, it was awarded based on fault of the marriage ending (think: infidelity or abuse). However, in the 1970’s, states began adopting a no-fault divorce law, meaning that a married person could file for divorce for no other reason than they were unhappy. With the adoption of no-fault divorces, most states now provide alimony based on marital roles and who earns what, regardless of fault or gender. In other states, alimony amounts are calculated based on a specific formula. While Maryland utilizes a specific formula to calculate child support payments, there is no similar formula to calculate alimony payments, although there are “alimony calculators” that can be taken into consideration. Instead, judges consider all of the facts of the marriage and divorce based on a list of factors that include (but are not limited to) the duration of the marriage; the age, physical and mental state of each party; and the financial needs and resources of each party, to name a few, along with the alimony calculators.
Alimony and Taxes through December 31, 2017
With divorce, comes some headache-inducing changes to the way you file your taxes. Not only do you currently have to remember to check the “single” box instead of “married, filing jointly”, but you can now no longer breeze through your 1040, leaving boxes blank with reckless abandon. Instead, you’ll have to pause at line 11 and list your “alimony received” under “Income” if you received alimony (obviously), or you’ll have to fill out line 31a under “Adjusted Gross Income” to reflect any alimony you paid. If you filed taxes in 2017 and you received alimony from an ex, you’ll have to list it as part of your income; if you paid alimony to an ex, that amount will be subtracted to give you your adjusted gross income (AGI). (We told you you’d get a headache and since we’re not accountants, always be sure to confirm this information with your own accountant).
But let’s see if we can break it down a little differently. Jack and Jill are getting a divorce and sign their divorce agreement on May 1, 2018. In the divorce agreement, it stipulates that Jack will pay Jill $2,000 every month, for 3 years, beginning on June 1, 2018. For tax years 2018, 2019 and 2020, Jack can subtract this $24,000 (annually) from his gross income; and Jill will have to add it to hers.
For all divorces dated prior to December 31, 2018, these tax laws (the 2017 tax laws, to be precise) on alimony will apply. The 2017 tax laws allow the spouse paying alimony to receive a tax break.
Alimony and the Tax Cut and Jobs Act (TCJA)
Hold on to your britches, because things are about to get (even more) interesting! On December 22, 2017 the TCJA was signed into effect, enacting a slew of changes to current tax law. Including, you guessed it, changes to how alimony is claimed. The TCJA will eliminate the alimony tax deduction for the payor spouse (the one writing the alimony checks), as well as the requirement for the payee spouse (the one receiving the alimony checks) to claim any alimony on their taxes as part of their AGI. The TCJA applies only to alimony payments that are part of agreements or court orders dated after December 31, 2018.
In other words, if Jack and Jill wait until January 2, 2019 to sign their divorce agreement, Jack will not be able to subtract the alimony paid to Jill from his gross income. Jill, on the other hand, will no longer have to claim Jack’s alimony payments as part of her AGI. This particular facet of the TCJA has some divorce and family law attorneys concerned that, in cases where alimony is likely, some higher dollar divorces could start to get…messy. This is because folks in Jack’s position (the payor spouse) will be incentivized to sign agreements prior to December 31, 2018, so that they can still get their tax deduction. Whereas folks in Jill’s position (the payee spouse) will want to drag things out, waiting for that December 31st deadline to pass so that she will no longer have to claim alimony payments as part of her AGI.
It is unclear at this point exactly how the changes brought forth by the TCJA will affect future Court decisions in determining alimony, but many divorce and family law attorneys speculate that the new tax consequences will be taken into consideration when awarding alimony.
Let us help!
As with any aspect of separation and divorce, you should be sure that you have skilled and knowledgeable representation at your side. Let the attorneys of Ferrante and Dill, LLC’s Family Law practice be the ones to guide you through this most trying of times. Call today to set up a consultation! (410) 535-6100 or email us at email@example.com.