As we’ve discussed on our blog in the past several months, updates to the U.S. tax code were implemented on the first of the year. Those changes, which include reworking of rules governing tax brackets and rates, also bring some significant changes to the way alimony payments will be taxed by the federal government.
While the new tax treatment rules for alimony are garnering considerable media coverage, many individuals with finalized or pending divorces are unsure as to how they will apply to their cases. To help answer some of the most common questions we hear from people concerned about the tax update, our legal team at Coker, Robb & Cannon, Family Lawyers has compiled an FAQ.
Q: Wait, is alimony the same as spousal maintenance?
Widespread coverage of the tax update can create confusion about alimony, often because the media will use different terms to describe “alimony.” Generally, both alimony and spousal maintenance refer to the payment one spouse makes to the other. Though many associate this with the payments a person sends their ex after a divorce, in many states and in many cases alimony can also be awarded during the divorce process on a temporary basis. The point of alimony, in a nutshell, is to ensure a spouse has the financial means to support themselves and maintain a similar standard of living they had during the marriage
In Texas, people still say “alimony,” but those payments are legally referred to as “spousal maintenance.” Depending on the facts of a case, a spouse is Texas can receive temporary spousal maintenance as they manage their financial affairs during divorce, and/or post-divorce spousal maintenance, the duration of which depends on various factors. You can learn more about spousal support in Texas on a blog we’ve previously published.The distinction between alimony and spousal maintenance has been centered on how the payments are taxed. As we will discuss, this distinction has been materially altered by the new tax update.
Q: What is the tax update exactly?
The tax update is part of the Tax Cuts and Jobs Act (TCJA), and it substantially changes the way alimony payments are taxed. Under the current rules, which have governed taxation of spousal support since 1942, a person who pays alimony to a former spouse is able to deduct those payments on their federal income tax return. The person who received those payments would then have to claim those taxes as income on their federal tax return. Although the TCJA was passed in 2017, some changes outlined in the measure, including those which apply to alimony, took effect on January 1, 2019.
On New Year’s Day 2019, those rules changed. Under the TCJA, individuals who make alimony payments will no longer be able to claim them as deductions, and those who receive alimony will no longer have to report the money as taxable income.
Q: Will the change impact my upcoming tax return?
No. In very simple terms, the tax change will not apply to 2018 federal income tax returns. However, they will apply in 2020, when Americans will file their federal income taxes for the previous year. With tax season approaching, you should consult a tax professional if you have any questions about the update and your particular situation. For the most part, however, spousal support taxes for your 2018 tax return will be based on the old rules (i.e. deductions if you pay, and taxed income if you receive).
Q: I have a pre-2019 divorce, will my alimony change?
Here’s where a lot of questions arise. The answer, as with many matters of the law, is that it depends. Generally, there are a couple points that can help you better understand whether your case will be impacted:
- The tax changes apply to divorces finalized on January 1, 2019 or after. They do not apply to old divorce cases finalized before the end of 2018.
- If you have already finalized a divorce before 2019, the tax treatment for your alimony will remain the same.
- Though your pre-2019 divorce means any alimony in your case is taxed under the old rules, that could change. Aside from Congress passing new legislation, a post-divorce modification of your alimony would mean that it will be taxed under the new system (no deductions for those who pay, and no need to claim as taxable income for those who receive).
Q: What happens if I need to modify my alimony?
As mentioned above any modification to alimony after January 1, 2019 will mean the new taxation rules will apply. That’s true even if your divorce was finalized before the tax changes took effect, whether it was 2018 or 1998 (the year our firm was founded).
You should also understand Texas law requires certain criteria to be met in order to obtain a modification of spousal support, be it contractual alimony or spousal maintenance. You can’t simply modify alimony because you think the new tax treatment is better for you in your particular situation. There needs to be a “significant change in circumstances,” which the petitioning party has the burden of proving. For example, this may include a serious illness or disability that prevents a person from being able to continue making support payments at their current amount, or a job loss followed by a fair amount of time in which you made efforts in “good faith” to find a similar paying job but were unable to do so.
Q: What’s the bottom line?
The bottom line is:
- If you have a pre-2019 divorce, taxation of your spousal support doesn’t change.
- If you have a pre-2019 divorce, any modification to your spousal support in 2019 or after means the new tax rules apply.
- If your divorce is still pending or you’re soon to start the process, you will be subject to the new tax treatment.
Addressing these issues and where they might fit in the overall divorce is a matter that should be addressed by an experienced lawyer. Remember, spouses have options when it comes to resolving spousal support and other aspects of divorce.
Coker, Robb & Cannon, Family Lawyers: Serving Denton & Collin Counties
If you have questions about divorce, spousal support, or any other family law matter, our team at Coker, Robb & Cannon, Family Lawyers are available to help. Our firm proudly serves individuals and families across Colling and Denton Counties, and offers confidential consultations during which we can review your case and discuss how we can help.
Contact us online, or call (940) 293-2313 to speak with a member of our team.