Renegotiating Alimony in Pennsylvania? Better Consider New Tax Laws
Alimony can be a contentious issue, and once settled, many might prefer to leave well enough alone. Sometimes, though, revisiting and revising alimony agreements are necessary. For instance, if the payor agrees to a longer term of payment or the recipient agrees to a shorter term, or the Property Settlement Agreement allows for modification of alimony.
In these cases, care must be taken that consequences of the new tax law are part of the discussion. Specifically, the parties must come to an agreement as to how they are going to treat alimony that may now no longer be deductible from the taxes of the payor.
To review, the 2017 Tax Act will apply to any divorce or separation instrument executed after Dec. 31, 2018. In such contracts, the payor can no longer deduct alimony from federal taxes and the recipient will no longer have to report it as income. If the contract was signed on or prior to Dec. 31, 2018 but the contract is reopened and the modification is signed after December 31, 2018, the Tax Act allows the parties to decide which tax code the revised alimony falls under.
Specifically, for post-2018 modifications, the 2017 Tax Act states that the repeal of deductibility (or for the payee, the removal of requirement to report alimony as income) is applicable: “if the modification expressly provides that the [tax] amendment made by [2017 Tax Act] applies to such modification.” In other words, the parties get to decide.
Assume the alimony recipient, currently receiving monthly payments of $1,000.00 under the pre-2019 contract, would like to renegotiate for monthly payments of $1,250.00 because payor’s income went up. Suddenly, the payor, if the modification does not specify whether the Tax Act applies or not, could now pay 25% of alimony or more (depending on his or her tax bracket) in taxes. In one moment, the payor could go from a tax deduction of $12,000.00 per year to a tax liability of $3,750.00 per year or more.
It would hardly be fair not to take this into consideration. This is why a lawyer and financial advisor trained in divorce finances are essential to alimony renegotiations. The law automatically pits the alimony recipient, who no longer will have to claim the payments as income, against the payor, who suddenly has to cover a considerable tax liability. While some recipients might understand this and consider it fair to agree to a lower monthly amount as compensation for the payor’s higher tax burden, it is more likely that talks will break down over this point.
I can help you renegotiate your alimony in light of the new tax laws. Call my office for a free first consult at 215-345-5259.
– Elissa C. Goldberg, Esquire
Law Office of Elissa C. Goldberg
107 North Broad Street, Suite 211
Doylestown, PA 18901