The new laws under the Tax Cuts and Jobs Act (TCJA) affect every taxpayer, with significant impact on those separating or divorcing.
As forensic accountants, we have seen first-hand the drastic impact of the new laws on those collecting and providing alimony. Now that the laws have been in effect for more than a year and statements reflecting the TCJA have been filed, divorced and divorcing parties all over the country are turning to hired professionals for guidance on how best to manage the changes.
The TCJA was signed at the end of 2017 and made several important modifications to the Internal Revenue Code, some of which directly relate to divorce. This legislation introduced big changes to how alimony is treated for tax purposes but specified that these changes would only apply to final divorce or separation agreements that were executed after December 31, 2018. The Court and parties also have the option to have the law apply to modification agreement after December 31, 2018 at their discretion. Under the new laws, people who pay alimony to their former spouses are no longer be able to deduct that money and the recipients are no longer required to pay taxes on that income for final judgments entered after Dec. 31, 2018.
This new alimony rule also affects prenuptial and postnuptial agreements. Historically, these agreements were agreed upon based on alimony amounts that were deductible. However, under the new law, prenups that include alimony will no longer be deductible when paid since the final judgement will occur after the December 31 deadline.
Forensic accountants are involved in preparing financial information for prenuptial and postnuptial agreements, identifying specific assets, reviewing financial issues, preparing statements and agreeing upon payment formulas. With the new TCJA alimony provisions, it may be necessary to modify an existing agreement to achieve the same results since any alimony payments will no longer be taxable or deductible. A forensic accountant is invaluable in navigating this complicated process and determining the new level of alimony.
The TCJA changed rules that have been in place for more than 70 years. And unlike some other stipulations of the TCJA, the rules affecting alimony won’t expire and will remain unless changed by Congress in the future. The rules were more far-reaching than people thought, indirectly affecting even more areas that have an impact on divorcing couples, not just the various agreements associated with a divorce. (For example, children won’t be the tax deductions they used to be.)
Perhaps the best advice we can give all our clients is plan ahead, know your state laws, and always be prepared. This will help get through tough financial and life-altering situations over which you have no control.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.