On December 17, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA). It was the largest tax overhaul since Ronald Reagan made sweeping changes to tax law in 1986. While much of the media’s attention has focused on what the new tax act means for individuals in terms of tax cuts and benefits for how they file their income taxes and the positive effects it will have on many businesses, one of the most overlooked changes brought about by the law is the way that it will affect divorce agreements and alimony tax rules.

What Does the New Tax Code Change?

Alimony first developed as a concept when marriages followed the traditional pattern of the husband who worked outside the home and the wife who took care of the household. In the past, when employment prospects for divorced women were limited, alimony laws were created to ensure economic fairness when a married couple divorced.

While both men and women now work outside the home, alimony laws still exist to ensure that the spouse who earns the higher income will continue to help financially support the spouse with the lower income for a specified period of time.

The new alimony law repeals a 75-year-old law that allowed the person who was making alimony payments to deduct those payments on their federal income tax. Meanwhile, the party receiving that payment had to declare the money as taxable income.

After December 31, 2018, under the new alimony tax deduction rules, the party making alimony payments under any divorce agreement will not be able to deduct those payments from their federal income tax. The party receiving those payments will no longer need to report them as income.

There will be no changes for any alimony agreement reached under a divorce settlement before December 31, 2018, unless modifications are made to the prior agreement for which the new TCJA laws apply.

There are strict IRS guidelines for determining whether alimony qualifies as tax-deductible. For any alimony payment to qualify it must meet the following eight requirements:

The alimony must be paid under a written degree of separation, separate maintenance, or divorce.

The alimony must go to a spouse or ex-spouse. You can make a payment to a third party such as a mortgage lender if the payments are made under the divorce agreement or are requested by the spouse or ex-spouse.

The divorce agreement cannot stipulate that the payment isn’t alimony.

After legal separation or divorce, the divorce parties cannot live in the same house or file a joint tax return.

All alimony payments are cash or the equivalent.

Alimony payments cannot be designated as fixed child-support or deemed child-support.

The tax return of person making the alimony payments must include the Social Security number of the person receiving the payment.

If the person receiving the payment dies, there is no longer any obligation to make payments. Under Delaware state law alimony payments cease when either ex-spouse dies or if the recipient of alimony payments remarries or “cohabitates” with a new partner.

How Does the New Tax Code Affect Your Divorce?

If your divorce is not finalized until after December 31, 2018, the new TCJA tax code could have a significant impact on your divorce.

On the surface, the new changes would seem to penalize the payer and benefit the payee. Since the alimony tax deduction will be eliminated and recipients will no longer have to include the payments in their taxable income, this will have a significant effect on the way courts will decide how to allocate alimony payments.

Normally the person making alimony payments is the higher earner and therefore is usually taxed at a higher rate. In the same way, the person receiving the alimony income is earning less and therefore taxed at a lower rate. Under the previous IRS tax code, the fact that the alimony payer could deduct the payments meant that there were more dollars available to make alimony payments. Thus, for most people going through a divorce, alimony payments were seen as an incentive to the person making the payment as a good way to avoid a nasty trial.

The new tax code undermines this incentive in the opinion of many experts on divorce in Delaware and in other states. They believe this will make divorce negotiations more difficult and the ability to reach a settlement harder. Since the person making the alimony payments will no longer have as much disposable income as they did previously, many will probably need to make smaller alimony payments. This means that alimony recipients after the December 31, 2018, deadline could lose 10 to 15% of what current alimony recipients receive.

Other important changes under the new tax code:

While many of the provisions of the TCJA will expire after 2025, the changes to alimony payments are permanent.

Many itemized deductions currently available for divorcing spouses will no longer be available after the December 31, 2018, deadline.

We cover itemized deductions in more detail below.

There are significant differences in dependency exemptions and child tax credits that will need to be taken into account when finalizing any divorce settlement. Again, a more in-depth look at these changes is below.

How Is Alimony Calculated in Delaware?

A judge in Delaware can award alimony in several different ways. They may grant temporary alimony during actual divorce proceedings if one of the spouses faces economic difficulties. In the final settlement, the person making the alimony payment will be directed to pay a certain amount on a specified date for a specified period of time.

Only marriages that last longer than 20 years are eligible for permanent alimony awards under Delaware law. In marriages that last less than 20 years, alimony payments cannot last longer than half the length of the actual marriage. So if a couple was married for eight years, four years would be the maximum amount a person would have to pay alimony.

In Delaware alimony is considered rehabilitative. It is paid by one spouse for a specified period of time so that the other spouse can either find a job or seek more training or education to improve their chances of finding employment. This means, however, that any person receiving alimony payments in Delaware has an obligation to seek employment or any training or education that may be necessary to find a job. The only exceptions are if the judge finds that this requirement is unnecessarily burdensome because of disability, advanced age, incapacitating illness or the needs to care for minor children living with the person receiving the alimony payment.

When a Delaware court determines the fairness of an award, they do not take fault into account. Instead, they consider certain important factors:

The economic situation of the spouse who is seeking an alimony payment.

The standard of living the couple maintained during the marriage.

How long the marriage lasted.

How old each person is, and their physical and emotional condition.

If either spouse has made any financial or other contribution to the other spouse’s career, education or improvement in income.

Whether either spouse has postponed their own economic or educational opportunities while married.

The ability of the spouse making the payment to provide for both their self and the ex-spouse.

And perhaps most important for this discussion of the new changes in the tax code, the tax consequences of any alimony payment.

As stated above, Delaware considers the death of either spouse or the remarriage of the recipient of alimony payments as justification for the termination of alimony payments.

Alimony Deductions After 2018

In any divorce agreement reached after December 31, 2018, ex-spouses making alimony payments will no longer be able to deduct those payments from the federal income tax.

In any divorce agreement reached after December 31, 2018, ex-spouses receiving alimony payments will no longer need to report those payments as income.

These changes will apply to any new agreement reached in the year 2019 and afterward. All old agreements reached before the December 31, 2018, deadline remain in place and will be treated by the IRS as they are currently. Remember that if you make any modifications to an existing agreement after the deadline, your alimony agreement may fall under the new rules.

Other itemized deductions and changes that will affect alimony payments and other elements of a divorce settlement include:

Fees paid to an attorney involved in helping to secure alimony payments are no longer tax deductible.

The mortgage deduction is reduced to $750,000 from $1 million. This is a tax that could affect property involved in a divorce settlement.

It will no longer be possible to deduct loan interest on home equity loans.

Couples involved in divorce settlement often need the help of tax lawyers to help them prepare their returns. Under the new tax code, neither spouse will be able to deduct tax preparation fees.

Other changes include reduced income tax rates for corporations. This could result in higher business valuations for closely held businesses. These are often an important component of property settlement agreements in a divorce and may affect a divorcing couple’s net worth.

Also, the new tax law allows for 529 education plans to be used for tuition expenses for elementary, middle and high school and not just college. Divorce settlements often include provisions for education expenses.

Another wrinkle concerns the new higher standard deductions which are $12,000 for single filers and $24,000 for couples who file jointly. It’s likely that under the new tax code fewer people will itemize their deductions. This is a concern for couples seeking divorce because there are important itemized deductions that deal with property and how debt is divided. When there are fewer deductions and the ones that are available are less valuable, spouses seeking a divorce will be reluctant to agree to how property and debts are divided and awarded in their settlement.

So what do these changes mean in a practical sense?

Let’s say Don and Betty are getting a divorce. They’ve agreed that Don will make a $5,000 alimony payment to Betty each month. Currently, Don is in the 32 percent tax bracket, and Betty is in the 22 percent tax bracket. If they finalize their divorce before December 31, 2018, Don will deduct that amount from his federal income taxes, meaning he’ll pay tax on a smaller income. Betty will report these payments as income on her tax returns, so she’ll pay $1,100 per month in income tax on that money.

If they finalize their divorce after December 31, 2018, the new TCJA rules will apply. Don won’t be allowed to deduct the alimony payments from his income and Betty won’t report it as income on her tax returns. Don will pay income tax on the alimony, but because he’s in a different tax bracket, the tax payment is higher. Don will pay $1,600 per month in income tax. The difference between what Betty will pay under the old rules and what Don will pay under the new rules is $500. That’s $500 less they have to work with each month and $500 more paid in income tax.

What About Dependency Exemptions and Child Tax Credits?

Exemptions reduce your taxable income. Credits reduce your tax liability. As of January 1, 2018, all dependency exemptions have been eliminated. Before TCJA, you were allowed to exclude up to $4,050 per dependent from your taxable income. These exemptions will not return until 2025.

The child tax credit offsets your taxes dollar for dollar. It is only available if you have a child younger than 17 at the end of the tax year and they have lived with you for at least half of the year. Before the TCJA, you could reduce how much you had to pay in taxes by $1,000 for every eligible child. That tax credit is now increased to $2,000 per child. This tax credit can only be used by the custodial parent. The noncustodial parent could only use this tax credit if the custodial parent agrees that they can claim it and filed IRS tax form 8332.

Note that the exemptions were for all dependents regardless of age or relationship while the credits only apply to minors. For example, if you support your child while they attend college, they are your dependent, but because they are legally an adult, they are not eligible for the child tax credit.

These exemptions and tax credits are important because they are very often taken into consideration by a judge in Delaware in determining how much alimony one spouse will pay to another. This is one of the few occasions where a divorced couple may wish to make modifications to their current agreement to reflect these changes.

So why did the government make these changes to the tax code?

According to media reports, the House Ways and Means Committee that wrote the code considers alimony deductions “a divorce subsidy.” In a statement made in November 2017, the committee said, “A divorced couple can often achieve a better tax result for payments between them than a married couple can.” The committee wants alimony to be treated like child support which is already not tax-deductible for the person making the payment or taxable for the person receiving the payment.

What Should You Do Moving Forward?

If you live in Delaware, and you and your spouse are seriously considering a divorce, it is in both parties’ best interests to contact a good divorce lawyer and begin to talk about a divorce settlement. Under the changes to the tax code, it is very likely that tax settlements in the future will become more difficult to achieve and create new obstacles for couples who are attempting to end their marriage amicably.

Already divorced couples who have an agreement may want to speak to a lawyer about any modifications concerning the elimination of the dependent exemption and the increase in the child tax credit and how these changes affect their agreement.

Although it is difficult at this point to determine who will benefit the most from these tax changes, it looks extremely likely that they will negatively affect both parties — the person making the alimony payment might not have as much money to offer and thus the person receiving the alimony payment will receive less income than they might have in the past.

If You Want to Understand How the New Tax Codes Can Affect Your Divorce, Contact Doroshow, Pasquale, Krawitz, and Bhaya

If you’re in Delaware and you want to speak with a knowledgeable divorce attorney about what these new alimony deduction rules mean for you in your current situation, then you should contact Doroshow, Pasquale, Krawitz, and Bhaya.

We are a client-focused group. We take the time to listen to each client, discuss their cases and help them understand the way the law applies to their situation. We will also take the time to help them understand why we recommend a certain course of action.

If you’re looking for sound legal advice, our attorneys have many years of experience dealing with divorce settlement negotiations. We also offer family law litigation services to those dealing with sensitive issues of domestic law. We provide cost-effective solutions and pride ourselves on obtaining the best results for those who seek our services. If you’re contemplating a divorce or you need to deal with child custody issues, our Delaware family lawyers are experienced in tackling all the different elements of family law.