From 1942 to 2019, alimony law in the United States remained unchanged. Payor spouses could deduct alimony payments from their yearly taxes, while payee spouses needed to count alimony received as income. The recent Tax Cuts and Jobs Act (TCJA) overhauled this until 2025. Keep reading to learn how this federal law can affect your pocketbook if you pay or receive alimony. Remember that you should call an experienced Memphis alimony lawyer for tailored advice.
How Did Alimony Tax Law Function Before?
Traditionally, alimony in Tennessee includes provisions for alimony in solido, rehabilitative alimony, alimony in the future, and transitional alimony.
Alimony in solido is also known as lump-sum alimony, in which the payor spouse sends either one large or monthly payment. It can also be added to one of the other types of alimony.
Rehabilitative alimony exists so that the payor spouse, in recognition of the time and opportunities given up by the payee, can support the payee spouse while they become economically independent. If, for any reason, the payee spouse can’t become self-sufficient, the court may order alimony in the future or periodic alimony, which is paid for a longer period until the payee spouse remarries or passes away.
Finally, transitional alimony refers to alimony received during a specified time until the payee spouse adjusts to a divorced life with the changes in lifestyle and location that this may bring.
Under the law, effective from 1942 to 2019, the payor spouse could deduct alimony from their taxable income. Similarly, the payee spouse had to report alimony on their income taxes. Some analysts believed that payee spouses benefited from the payor’s willingness to accept a higher alimony amount in light of the tax deduction.
For example, if a higher-earning ex sends $30,000 in alimony, where they usually would pay 33% in taxes, their deduction would be worth $9,900. Suppose the lower-earning ex has taxes at 15%; they will need to pay $4,500. This amounts to a savings of $5400 between the two, though we must remember that the divorced individuals no longer form a single household.
How Does the TCJA Impact Tennessee Alimony Law?
The Tax Cuts and Jobs Act (TCJA) changed how tax deductions worked concerning alimony. It was signed into law on December 22, 2017, and set to become effective on January 1, 2019, until 2025, when the previous alimony regulations, as explained above, would return.
The Internal Revenue System (IRS) would be responsible for using those previous regulations for all divorces before and during 2018. Divorces finalized in 2019 or later would be subject to the new system. Divorcing individuals who had agreed to a prenup based on the old regulations would likely need to renegotiate.
Until more time passes, it will be difficult to say which trends are emerging in applying the TCJA. There are several possible areas of concern. Without the tax deduction, will payor exes enter a higher tax bracket? Could losing the tax deduction also cause the payor to owe more in child support or child medical expenses? Only the future can tell.
