How Prenups Are Affected by the New Tax Plan

In December 2017, Congress and the Trump administration passed a tax overhaul. The plan significantly impacts prenuptial and alimony agreements. This post attempts to provide an overview of what those who currently have or are considering prenuptial or alimony arrangements, need to know.

How Do Taxes Relate to Prenuptial Agreements and Alimony?

One common feature of prenuptial agreements is a provision specifying how much a partner will pay in alimony (spousal support) to another partner. Under the old tax plan, every dollar in alimony reduced the alimony payer’s taxable income by the same amount. So, if an individual paid $50,000 per year in alimony, their taxable income would be reduced by $50,000. The new plan eliminates this deduction, which means that an individual’s pre-tax income could effectively double. Also under the new plan, alimony recipients will get the money tax-free, instead of having to report the money as part of their taxable income.

What Does This Mean for an Existing Prenuptial Agreement to Pay Alimony?

The tax plan was written such that it does not affect divorces and separation agreements finalized before the end of 2018. However, there are several ways prenuptial agreements pertaining to alimony can be challenged, such as if the agreement was signed without both parties having the opportunity to independently consult with a lawyer, if the agreement was signed under duress, or if the agreement is fundamentally unfair to a party.

The tax plan likely creates a new avenue for challenges, because courts will at some point consider the effect that this tax plan has upon one partner’s ability to pay alimony and because many prenuptial agreements specifically mention that payments are intended to be deductible. Courts could hold that one spouse is now bound by unfavorable terms because of the changed tax law, that the agreement as written, is unenforceable, and reduce alimony payments.

What Should You Do if You Have a Prenup?

Individuals with existing prenuptial agreements can amend their existing agreement to take into account this change in the law. If agreements are not amended to incorporated the change in tax law, it is possible that existing plans can be challenged in the event of a divorce, which would throw the certainty provided by prenuptial agreements out the window. Those with existing prenuptial agreements should seek the advice of an attorney as well as a financial advisor regarding their options.

What Should You Do if You Are Paying or Receiving Alimony?

If you are currently paying or receiving spousal support, you may want to consult with an attorney to get a better sense of how the new tax plan could affect your finances. Modifying an existing arrangement can be difficult but is not impossible, and it is important that parties who are either paying or receiving be prepared for any potential change to their current arrangement that results from the new tax plan.

Our Tampa Divorce Law Attorneys Can Guide You

A prenuptial agreement is supposed to provide certainty in the event of a separation. If you have questions or are concerned about how your prenuptial or alimony agreement is impacted by the new tax plan, contact the experienced Tampa family law attorneys at Blair H. Chan III, PLLC, for information about your options today.