Alimony, taxes and a Texas divorce: The rules are about to change

The new tax law will effect alimony payments in Texas.

The Texas state law allows for the payment of alimony, or spousal support, as part of a divorce settlement agreement. Alimony, like everything else in family law, is a creature of state law.

How does alimony work in Texas? In Texas, the court can generally award an alimony payment of up to $5,000 per month or 20 percent of the paying spouse's monthly income.

In most cases, Texas law also applies time limits to alimony payments depending on the length of the marriage. For example, a spouse from a marriage that lasted less than ten years can generally receive alimony payments for up to five years, while a spouse from a marriage that was over 30 years can receive payments for up to 10 years.

How is a federal law impacting divorce? Although a creature of state law, the government may tax financial transactions that occur during a divorce. As such, some federal laws do impact divorce. The Tax Cuts and Jobs Act (TCJA) is one example.

The Internal Revenue Service (IRS) taxes alimony payments. Currently, the recipient of the alimony payment lists the money on his or her income tax returns while the payor takes a tax deduction. This tax strategy allowed the spouse requesting alimony payments a bit of a bargaining chip.

The TCJA will impact the taxation of alimony. There is no longer a "divorce subsidy." The TCJA has removed the deduction noted above. The change goes into effect on all divorces finalized after 2018.

Why has the government changed how it taxes alimony? Ultimately, the change will translate into increased revenue for the government. The Joint Committee on Taxation has estimated the change will result in a gain of $7 billion over the course of ten years.

What does this mean for couples going through divorce in Texas? Couples that have already decided to divorce may consider moving forward to finalize the divorce before the end of 2018 to take advantage of the old tax rules before they lapse.

Couples that are considering divorce should note this is just one of the impacts of the TCJA. The changes can also impact how taxes are applied to the family home and the benefits that come with claiming a child as a dependent. Due to the complex nature of these considerations, it is wise to seek legal counsel to reduce the risk of surprises after the divorce is finalized.