By now I'm sure that you've heard President Donald Trump signed a new tax law into effect back on December 22, 2017 that is sure to have big implications for just about everyone. While many of the headlines will focus on tax rates and the effects on your monthly paycheck, also contained within the new tax bill are provisions that will fundamentally change how alimony is treated for tax purposes throughout the country.
As it relates to the payment and receipt of alimony, prior to the enactment of this new tax law, the party paying alimony was entitled to deduct their payments from their tax liabilities, while the party receiving the alimony payment would end up paying taxes on their alimony as a form of income. This, however, has been turned on its head by the new tax law. Starting with alimony-related judgments after January 1, 2019, the spouse paying alimony will no longer be entitled to deduct those payment amounts from their overall tax liability, and the spouse receiving the alimony payments will no longer have to pay taxes on their alimony payments.
The prior tax laws were seen by many divorce attorneys as a way to preserve more money for the divorcing parties, allocating tax liabilities between former spouses and helping each party to afford to live separately. There are now concerns that with the new tax laws set to take effect in less than a year that it will leave less money overall for the divorcing family.
To help explain the effect of the new law a little better, imagine that one spouse is paying alimony in the annual amount of $20,000. Under the old tax law, if the paying spouse were to pay and then deduct $20,000 per year in alimony, with their income being taxed at the federal rate of 33%, then the previous tax law's deduction had the potential to save them about $6,600 per year. On the flip side of that equation, the party receiving the alimony payments of $20,000 per year, if taxed at a standard rate of 15%, would see them paying about $3,000 per year in taxes, rather than the $6,600 that the paying spouse would have incurred under their tax rate. As a result, under the old system, the parties would have saved about $3,600 between the two of them, providing the paying spouse a tax break that makes the payments more affordable. These same savings would not be seen under the new tax law due to the difference in the allocation of the tax liability.
So why was the law changed and why did the folks in Washington think this was a good idea to change up the tax responsibilities as they relate to these alimony payments? In writing the new tax law, Congress has referred to the alimony deduction as a “divorce subsidy,” and it appears that part of their rationale was to try and close the gap in which it was seen that a divorced couple could often obtain a better tax result for alimony payments made between former spouses than a still-married couple could.
Additionally, by making the paying party pay the taxes on alimony payments, it would bring alimony payments in line with child support payments, which historically have not been tax-deductible for the payer or taxable for the recipient. Of course, another significant reason for the change is the government's bottom line, as Congress’s nonpartisan Joint Committee on Taxation estimates that by repealing the alimony deduction, the government has the potential to add $6.9 billion in new tax revenue over 10 years.
During the course of your divorce, it is generally a good idea to consult with an independent tax professional to ensure you understand how taxes could impact your overall settlement agreement, and with these new tax laws ready to take effect, this will be become even more important.
If you have additional questions or concerns about your alimony requirements or the new tax law, it's important to speak with an experienced family law attorney to discuss your specific case and circumstances.