There are many changes imposed by the Tax Cuts and Jobs Act of 2017, signed by President Trump on December 22, 2017, affecting divorcing spouses. One of the most significant provisions deals with the income tax impact associated with making and receiving alimony payments. The Act eliminates Sections 215 and 71 of the Internal Revenue Code, which allowed spousal support payments to be deductible by the payor and includable as income to the payee. As a consequence, the income tax treatment of alimony is completely overturned. The payor can no longer deduct the payment of alimony and the payee is no longer required to include the payment on each of his or her respective income tax returns. This change to the treatment of alimony, unlike many other tax provisions included in the Act, is permanent and does not sunset on January 1, 2026.
What exactly does this mean? The Act will likely cause modern divorce settlements to look very different. Instead of requiring the wealthier spouse to pay alimony and equally splitting marital assets as was traditionally done in the past, couples may now focus on disproportionately dividing marital assets in a manner that favors the lower-earning spouse and eliminate alimony to avoid the new income tax regime. Wealthy families are more likely to have this flexibility due to the size and type of assets included on their balance sheets. For example, this could be structured by using real estate holdings, retirement accounts or other valuable assets. If a couple does not have substantial assets, there is no opportunity to allocate assets in favor of the non-moneyed spouse and the parties will be forced to incorporate alimony in divorce settlements.