One of the biggest impacts of the Tax Cuts and Jobs Act (TCJA) in family law was the change in the tax treatment of alimony. Under the old law, alimony and spousal support payments were deductible by the person paying and includable as income by the person receiving them. This was an important consideration in settling divorce cases because the spouse with the higher income generally had an easier time accepting the reality of a payment to an ex-spouse because they got a tax benefit in exchange. Divorce attorneys always had to consider the tax consequences of alimony and spousal support payments.
The new law, which took effect on January 1, 2019, did away with the previous tax treatment of alimony and spousal support. This means that the payments are no longer income to the person receiving and the person paying the support also pays the taxes on the income stream diverted to the ex-spouse. The change in the law impacts agreements and orders entered into after December 31, 2018. If an agreement was executed prior to December 31, 2018 and modifications are made later, the TCJA will not apply unless the agreement specifically states that it will. This means that practitioners need to take extra care when drafting any modifications to ensure the intent is clear.
Pennsylvania has since adjusted the support guidelines and the way support is calculated to address the TCJA changes, such that the support numbers are now closer to what the payment would have been if the tax treatment still existed – but stay tuned! As with any major overhaul of a long-established law, the kinks are still being worked out.
This recent change also highlights the importance of anticipating future changes when drafting divorce agreements. Although the TCJA change to the alimony rules is permanent, changes that could have a big impact on divorce matters are always possible when it comes to the tax code. It is a good idea for divorce attorneys to include provisions for potential changes in an alimony agreement so that the agreement can be modified if necessary.