The new tax law and alimony provisions in prenuptial agreements

Many engaged couples put provisions in their prenuptial agreements regarding whether one of the spouses will pay alimony (spousal support) to the other if the marriage ends. They may stipulate an amount of alimony and/or conditions under which it will be paid, such as if the marriage lasts a certain number of years.

The financial sting of having to pay spousal support has been offset by the fact that it’s tax deductible for the payer. Recipients report it as taxable income. Thanks to the tax plan that was signed into law last year, that changes with divorce agreements effective on Jan. 1, 2019 and after.

Alimony will no longer be tax deductible for payers or taxable as income for recipients. That makes the real financial impact of alimony greater for those paying it — and significantly greater for those in high tax brackets. It doesn’t matter that the amount of alimony was agreed on years or even decades before the new law went into effect.

Family law attorneys are faced with the uncomfortable task of making sure that their clients know about the changes to the tax law and the potential financial impact on them if they divorce. One attorney opted to include the information in a client newsletter rather than contact clients individually.

Meanwhile, spouses who agreed years ago to pay alimony and would like to modify the prenup to take into account the new law may not know how to bring up the subject with their husband or wife. As one attorney notes, “It would open up a huge can of worms.”

Couples modify prenups over the course of their marriage for any number of reasons as circumstances change. However, both spouses have to agree to those modifications. If the spouse slated to receive alimony in a divorce refuses to change the prenup, a paying spouse could challenge that provision in a divorce if the new law would greatly change the financial impact on him/her. Judges will likely be confronted with such challenges in the years ahead.

If you are considering modifying the alimony provision in your prenup, it may be best to talk with a financial advisor to see if the potential impact of the new law would be significant enough to warrant asking your spouse for a modification. Your Arizona family law attorney can also provide valuable guidance.