The 2017 Tax Cuts and Jobs Act brought with it many changes to our nation’s tax laws, including changes that could affect divorcing couples in Virginia and nationwide. Specifically, these tax laws affect how spousal support, also known as alimony, is paid and taxed.
Currently those who receive spousal maintenance must report these payments as income on their federal income tax filings, and those who pay spousal maintenance in cash can deduct these payments on their federal income tax filings. However, starting on January 1, 2019, those who pay spousal maintenance cannot deduct these payments and those who receive spousal maintenance do not have to report these payments as income. The new law applies to all those who finalize their divorce after January 1, 2019. Therefore, some people are pushing to finalize their divorce before the New Year, so they can be grandfathered into the current spousal maintenance tax laws.
In addition, the new tax law also affects the funds a divorced person takes out of their retirement accounts. First, starting in 2019 those who pay spousal maintenance can do so by transferring money from a retirement account. In this way, a person paying spousal maintenance can do so without being taxed, which would be the case if the funds were withdrawn from their retirement account. Instead, a spouse receiving spousal maintenance from their ex’s retirement account will be responsible for paying taxes on the funds received.
There are certain rules, however, for this tax law to apply. The spouse receiving spousal maintenance must be age 59.5 or above. If not, the receiving spouse will be penalized 10 percent on the funds withdrawn, along with the regular taxes they would pay on those funds. In addition, transferring funds from a retirement account could only be done one time and language permitting such a transfer must be included in the final divorce decree.
As this shows, couples seeking a divorce will have to decide whether it is financially savvy to complete their divorce before the New Year or after. Therefore, the new laws may affect how divorce negotiations are handled by couples trying to settle their divorce out of court, especially if one spouse wishes to complete their divorce in 2018, while the other spouse wants to do so in 2019. It is important that those seeking a divorce understand how these laws will apply to them, so they can make informed choices.