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The Tax Cuts and Jobs Act (TCJA) that was passed in 2017 and signed into law by President Donald Trump. The Act makes significant changes to spousal maintenance for all divorce agreements finalized after December 31st, 2018.
Starting in 1942, any taxpayer that paid alimony, also referred to as Maintenance, received a tax deduction for the amount paid. The person receiving the maintenance was also required to report the money as taxable income. This long-standing rule was drastically changed starting in 2019.
For new agreements, under Federal Law, maintenance payments are no longer tax deductible, and the receiver is no longer required to report the money as taxable income. The TCJA has effectively changed the burden of tax from the payee to the payor, which is going to have significant ramifications.
Those paying maintenance are losing a significant deduction which is going to result in a significantly higher tax bill at the end of the year. For agreements before January 1st, 2019, the old law is grandfathered in, so those who had previously gotten a deduction will still receive it, and those that were already required to report the money as taxable income will continue to do so.
The new law may come into effect for old agreements if there is a modification to the terms of the contract and the new conditions are specifically noted to be under the terms of the TCJA. This possibility will now open more areas of the agreement to negotiation if there is a possibility of shifting the tax requirement to the person paying.
Most of the provisions in the TCJA are scheduled to expire in in 2025. However, the rule on maintenance, according to the TCJA, is permanent.
In many divorce agreements, there is a provision that discusses who is paying for the children's college education. In many cases, to start saving early, parents are opening 529 accounts. Money from this account was only able to be used for college or post-High School career education, such as a trade school. With the new law, 529 accounts may now be used for any education-related expenses starting in elementary school.
What does this mean for those who had started 529 accounts to pay for college? It means that the balance of the account could be lower, even significantly, by the time the child goes to college, leaving a much higher amount to be paid than had previously been expected or planned.
In cases where the children are still young, parents can account for this new rule during planning. With children who are only a few years away from college, if they start to tap into their 529 accounts now, it could lead to a sizeable unexpected shortfall of money available for a college education.
This change in law can lead to more student loans, more unplanned out-of-pocket expenses, and the possibility of having to put off college or severely limit the choice of which colleges are affordable.
The Tax Cuts and Jobs Act has made significant changes that will benefit some and cause a more considerable amount of expense for others. With these changes in place, it is vital to speak to an experienced family law attorney. Now more than ever, having the right attorney is essential.
Call (516) 252-0223 today to discuss your divorce agreement with a Nassau County family law attorney. Our legal team is here to serve you.