“An Act to provide for the reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” better known as the Tax Cuts and Jobs Act of 2017 (“TCJA”) is the most sweeping tax changes we have seen in the United States in more than 30 years. But what does it mean for those thinking about a divorce, seeking a divorce, or those already divorced? A lot. Here at the office of Pamela M. Copeland, Esq., Counsellors at Law, we cannot stress enough the importance of seeking tax advice from a certified public accountant and strongly urge our clients to do so. This post highlights some of the changes and issues which may affect you, and the issues we are prepared to address with you.

The Act itself is 185 pages long and makes significant changes to a multitude of items within the tax code. That is why the advice of an accountant to review your personal financial circumstances is strongly recommended. Beginning in 2018, the federal income tax brackets change (both individual and corporate), the standard deduction and personal exemptions change, personal credits including the dependent child credit have increased, and there is a limit on the deduction of state and local taxes, as well as a multitude of other changes. The change causing the most concern for many of our clients and fellow family law attorneys is the change in the treatment of alimony.

Generally speaking, pursuant to the Internal Revenue Code of 1986 (“IRC”), gross income for federal tax purposes includes amounts received as alimony or separate maintenance payments, provided such payment is received by (or on behalf of) a spouse under a divorce or separation instrument. This means that the recipient must include the alimony received in his/her gross taxable income, and thereby pays federal income taxes on the amounts received. The payor, on the other hand, has the benefit of a federal income tax deduction for the payments made. There are additional criteria that must be met but generally speaking, Courts and family law attorneys have operated for years under the premise that alimony is deductible for the payor and includable as income for the recipient. In many cases, the ability of the payor to deduct alimony from their gross taxable income has been an incentive when settling cases. Beginning in 2019, the TCJA eliminates all of that.

Under the TCJA, divorce or separation agreements signed after December 31, 2018 which include provisions for alimony or separate maintenance payments, will not have the benefit of the income tax deduction for the payor, nor will the recipient have to report and pay income taxes on the support received. (It should be noted that the TCJA applies to federal income tax returns, and not state returns.) How does this new tax provisions effect prior divorce agreements? That depends. If you are already divorced pursuant to a Judgment of Divorce with a settlement agreement or a trial court’s Order, the enactment of TCJA does not, in and of itself, change the terms of your agreement and you may continue to deduct alimony if you are the payor, as the recipient must include the amounts received in his/her gross taxable income and pay federal income taxes on it. However, many of us in the field of family law have some concerns. While the TCJA may not by itself constitute what we term a “change in circumstances” warranting a review of the support provisions set forth in prior agreements or trial court orders, if there are other changes in circumstance which the Court believes warrant a review of a support provision, the new tax code could lead to a litigant arguing that given all of the circumstances, it would be equitable to apply the law even though the agreement was entered prior to its enactment and effect. Obviously these cases would have to be evaluated based upon the unique circumstances of the parties raising the issue. As the TCJA is new, the actual regulations have not been written, and there is no case law yet, time will tell how the Courts will address such a situation.

What if both parties sign an agreement during 2018 but their actual divorce proceeding does not take place until 2019? Can the payor still deduct his/her alimony payments and will the recipient have to include the payments in his/her income for federal tax purposes? There are conflicting opinions. A logical reading of the TCJA seems to indicate that a divorce “or separation instrument” will suffice. Meaning, if the “separation instrument” is signed in 2018, and does not specifically state that the TCJA applies, the payor may still deduct his/her alimony payments and the recipient must consequently include the payments in his/her income for federal income tax purposes. Some accountants and family lawyers read the TCJA as requiring both to occur, e.g., an agreement must be signed by December 31, 2018 and a divorce judgment must have been entered by December 31, 2018, in order to continue to permit the alimony deduction/inclusion in income. Consequently, we will include specific language in our clients’ agreements relating to this issue.

While many have focused on the new alimony provisions of the TCJA, there is another issue of immediate concern, and that is child support. While the TCJA does not specifically deal with it, the revisions in the tax code itself affects the calculation of child support. Courts and/or lawyers complete a child support guidelines worksheet to do so, by inputting into a computer program the parties’ incomes, taxes, parenting time, and other considerations. As of the date of this article, the computer programs the Courts and family lawyers utilize have not been updated to reflect the specific tax changes for 2018 pursuant to the TCJA. Moreover, since there are additional tax code changes beginning in 2019 (e.g., the inability to deduct alimony), the child support programs will have to be updated once again for the year 2019, as some parties will still be able to deduct alimony while others will not.

The bottom line when it comes to these sweeping tax changes is that clients need to seek and obtain proper advice from an accountant and further need the services of a knowledgeable and experienced family law attorney, such as the attorneys here at the offices of Pamela M. Copeland, Esq., Counsellors at Law. We are approaching uncharted territory with the enactment of the TCJA, but with our expertise and guidance, we will be able to guide you through smoothly.

Meredith E. Allen

Meredith E. Allen, Esq., Of Counsel to the firm, is an attorney at law of New Jersey. Her practice is dedicated exclusively to family law. She has authored and co-authored several published articles on family law for the New Jersey Institute of Continuing Legal Education and the New Jersey Law Journal.
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