How the New Tax Law Affects Alimony Payments
In divorce situations, one spouse or ex-spouse may become legally required to make spousal support payments to the other party. Since these payments are typically substantial, obtaining tax deductions for the payer has often been an important part of negotiations.
Alimony, also known as spousal support or maintenance, is court ordered payments designed to ease the financial hardship of dependent spouses once a marriage ends. Factors that the court considers when determining spousal support are the length of the marriage, age, earning potential, health, future job prospects, work experience, and educational background.
For the past 75 years, alimony was deductible for the payer, and the recipient paid income tax on it. However, the massive new tax plan Congress passed late last year changes that. Under the Tax Cuts and Jobs Act (TCJA), in all divorces after December 31, 2018, alimony will no longer be deductible for the payer, and taxes do not need to be paid on it by the recipient.
The current deduction typically saves the payer a significant amount and leaves more money to divide between spouses. Additionally, the new tax law may also affect those looking to modify spousal support. As 2019 approaches, many divorce attorneys anticipate this change to impact negotiation strategies.
The biggest beneficiary is the federal government. Since the spouse paying alimony and then deducting those payments is often in a higher tax bracket than the recipient spouse, the IRS nets about 25 percent less under current rules.
The House Ways and Means Committee calls the impending deduction consider the impending deduction a “divorce subsidy.” Findings by the Joint Committee on Taxation estimate that eliminating this deduction will lead to nearly $7 billion in new tax revenue over the first ten years. The Census
Bureau tells us that 243,000 ex-spouses received spousal support payments in 2016. However, the IRS reports that 361,000 taxpayers claimed to make alimony payments in 2015, while only 178,000 taxpayers claimed to receive alimony payments that same year.
By contrast, those who oppose the new provision claim that the higher-earning spouse will wind up paying less, while the recipient receives less. The current set up allows for larger payments with lower cost after taxes.
According to estimates, alimony payments could be as much as 10 percent to 15 percent smaller than under present rules. Less money for alimony could make it more difficult for recipients to make ends meet and support themselves.
Furthermore, those who oppose the new alimony provisions claim that divorces may become messier. Offering tax relief to alimony payers typically helps to move the negotiations along.
In summary, the new tax law may have a significant influence on divorce, divorce settlements, and even divorce strategy and negotiations.
If you are interested in filing for divorce in Florida, schedule an appointment with our New Port Richey divorce attorney at Dale L. Bernstein, Chartered Law Office today. Get more than three decades of legal experience on your side immediately!