Tax Law Changes Affecting Family Law: 2019 Changes and Recap of 2018 Changes

2019 Changes

By now, many are familiar with the changes from the Tax Cuts and Jobs Act (TCJA), however, specific changes related to family law and alimony deductibility went into effect in 2019.

• Alimony Payments. Effective January 1, 2019, alimony payments are no longer deductible to the payer spouse, and are no longer taxed to the recipient spouse. This applies to divorces finalized, by settlement agreement or court order, on or after January 1, 2019. Under the prior law, alimony was deductible to the payer, reducing income and basis for taxes, and taxed to the recipient, increasing income and basis for taxes. The change is permanent and will not sunset, like some of the TCJA amendments.
• Income from Trusts. Also, under the prior law, income of a (alimony) trust paid to the ex-spouse was taxable to the recipient and not to the grantor. The TCJA eliminated that rule.
• Existing Agreements and Modification Requests. Existing alimony or marital dissolution agreements, as well as any modification requests, are grandfathered to pre-January 1, 2019 rules as per existing agreements, unless both parties mutually consent and specifically opt to implement new rules. Alimony modification requests made January 1, 2019 and after will require recognition of the changes of the tax law.

Recap of 2018 Changes

We discussed many of these in a prior newsletter. The changes are as follows.

• Personal Exemptions. Under the new tax law, personal exemptions are eliminated. Previously, personal exemptions were often used during divorce settlement negotiations with the parties splitting these deductions and sometimes one spouse compensating the other spouse to “purchase” the use of this exemption.
• 529 Plans. The new tax law expands the use of 529 plans to include secondary education and other uses, whereas it was previously only available for college and higher education. Often, 529 plan accounts exist in a marital estate and become a topic discussed during settlement negotiations for how/when they will be used.
• Business Valuation. TCJA reduced corporate income tax rate from 35% to 21%. The valuation of C corporations could be higher simply due to the mechanics of income approaches to value a business, all other factors held equal.
• Child Tax Credit. The TCJA increased the credit to $2,000 and the income phase-out increased to $200,000 ($400,000 for joint filers).
• Other Deductions. TCJA repealed legal and accounting fees related to taxable alimony, divorce-related tax planning, and related analysis. The TCJA suspends the miscellaneous deductions through Dec. 31, 2025. This also applies to professional fees related to splitting of Individual Retirement Accounts or ERISA plans (e.g., QDRO fees).