On January 1, 2019, alimony payments will no longer be tax deductible. Under the 2018 Tax Cuts and Jobs Act (“TCJA”), alimony will likewise no longer be considered taxable income to the payee spouse. The new tax bill repeals the alimony deduction, and the recipient spouse is not taxed on the alimony received. Under this system, spousal support is now treated exactly like child support.
Under the new tax bill, the higher-earning spouse providing support to their ex will pay taxes on the income to be paid out as alimony at their higher tax rate. This will reduce the total income available to the family while (theoretically) increasing tax revenues collected by the government.
For couples splitting up in 2018, negotiations surrounding spousal support will be strained. The paying spouse will not have any incentive to pay additional alimony to receive a tax break. The overall tax on the divorcing couple will be significantly higher by a factor of 5%-10% in many cases. Thus, the recipient spouse will receive less money to live on. But, the recipient spouse will also enjoy a lower tax bracket, if they are working, because their adjusted gross income will not be pushed up by the alimony payments.
There are some tricky elements of the implementation of the law. For pre-2019 spousal support agreements, the payments will continue to be treated in the same manner as under prior law. For post-2019 spousal support agreements, the payments will be made in accordance with the TCJA. But, what about modifications of old agreements? The TCJA has a section that specifically indicates that modifications can opt-out of the old system and opt-in to the TCJA.
Spousal support and maintenance are generally negotiated between the parties and/or litigated in court and become part of the divorce decree or final judgment of divorce. Support exists for situations when one spouse cannot meet their living expenses without financial assistance from the other spouse. Where both spouses work and earn about the same amount of income, spousal support is less common.
The Census Bureau reports that 243,000 people got alimony last year, 98% of them women. The payouts totaled about $9.6 bn. About 1 million people get divorced in the U.S. every year. The National Organization for Women and the American Academy of Matrimonial Lawyers opposed the change.
Under prior law, alimony and maintenance payments were treated as deductible expenses to the payor (former IRC § 215(a)). Likewise, these payments were treated as taxable income to the recipient (former IRC §§ 71(a), 61(a)(8)).
As famously stated in The War of the Roses, a famous divorce film: “There is no winning! Only degrees of losing!” Everyone loses under the new tax bill. The government ostensibly wins, but it remains to be seen whether payor-spouses “factor-in” the higher taxes and reduce the payouts they will agree to, thereby eliminating the effect of the new law entirely.
If you have questions about alimony or spousal support under the new Tax Cut & Jobs Act, give us a call at (201) 529-8024 or e-mail me at [email protected]
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