How will the Tax Cuts and Jobs Act Impact Divorce Agreements?
Spousal Support or Alimony
The Tax Cuts and Jobs Act of 2017 (TCJA) made significant changes to the federal tax code. The TCJA made significant changes to spousal support for all divorce agreements finalized after December 31st, 2018 changing a law that had been in place since 1942.
Under federal law, spousal support is no longer tax deductible for the person who is paying the support. The person who is receiving the support is also no longer required to report this money as taxable income. For new divorces, the burden of tax has effectively been moved from the payee to the payor.
It is very important to note that this new law does not affect any agreements that were finalized prior to January 1, 2019. All previous agreements are grandfathered in so if you have been taking the tax-deduction, you will still be able to take that deduction and the person receiving payment will still have to claim that money as taxable income.
However, if for any reason, either spouse looks to make any changes to an existing agreement, it is possible that the new law will impact the agreement. The new law may come into effect for old agreements if there is a modification to the terms of the contract and the new conditions are specifically noted to be under the terms of the TCJA.
The new law may also come into effect if you are changing your pre-January 1, 2019 spousal support order from a temporary order to a “permanent” order pursuant to the Judgment in your case.
While many of the provisions of the TCJA are set to expire in 2025, this part of the tax code is permanent.
Under federal law, spousal support is no longer tax deductible for the person who is paying the support. The person who is receiving the support is also no longer required to report this money as taxable income. For new divorces, the burden of tax has effectively been moved from the payee to the payor.
It is very important to note that this new law does not affect any agreements that were finalized prior to January 1, 2019. All previous agreements are grandfathered in so if you have been taking the tax-deduction, you will still be able to take that deduction and the person receiving payment will still have to claim that money as taxable income.
However, if for any reason, either spouse looks to make any changes to an existing agreement, it is possible that the new law will impact the agreement. The new law may come into effect for old agreements if there is a modification to the terms of the contract and the new conditions are specifically noted to be under the terms of the TCJA.
The new law may also come into effect if you are changing your pre-January 1, 2019 spousal support order from a temporary order to a “permanent” order pursuant to the Judgment in your case.
While many of the provisions of the TCJA are set to expire in 2025, this part of the tax code is permanent.
529 Accounts
Under many divorce agreements, there are provisions for who will open or fund a child’s 529 account. 529 accounts are savings accounts where the money may only be withdrawn and used for education related expenses for a specific child.
529 accounts were originally meant to be used for college or other higher education. This money can now be used for any education related expense starting in elementary school.
Unless there is an agreement on how the money will be used, this may lead to 529 accounts having lower balances than originally planned when a child reaches college leading to a higher level of out-of-pocket expenses and greater burden on a parent who is responsible for paying for college.
529 accounts were originally meant to be used for college or other higher education. This money can now be used for any education related expense starting in elementary school.
Unless there is an agreement on how the money will be used, this may lead to 529 accounts having lower balances than originally planned when a child reaches college leading to a higher level of out-of-pocket expenses and greater burden on a parent who is responsible for paying for college.
