President Trump recently signed the giant tax overhaul that includes a provision scraping a 75-year-old tax deduction for alimony payments.
Alimony payments, typically defined in the terms of a divorce settlement, are the payments someone gives to an ex-spouse who earns less money. Statistics vary, but The IRS says that approximately 600,000 Americans claimed an alimony deduction on their 2015 tax returns, the most recent year for which data is available.
Under the prior law, ex-spouses paying alimony were able to deduct the expense from their federal income taxes. Ex-spouses receiving alimony payments were able to claim the money as taxable income. The recipient of alimony had to include any payments of alimony as income on their tax return, which subjected them to income tax on each dollar received.
That all changes soon. Although the recent repeal of the provision won’t impact couples already legally divorced or separated (not even those finalizing the process in 2018), but it will impact those ending their marriages in 2019.
In any divorce commenced after December 31, 2018, the spouse paying alimony can no longer deduct it and the spouse receiving the money no longer has to pay taxes on it. Divorce lawyers say the current setup tends to preserve more money overall to allocate between spouses, which helps them afford living separately.
Some experts worry the change will make negotiations tougher and lead to less spousal support as cash goes to taxes instead. Congressional tax writers say it’s only fair to married couples.
Why the Change?
The tax-writing House Ways and Means Committee calls the alimony deduction a “divorce subsidy.” Last month, the committee noted, “A divorced couple can often achieve a better tax result for payments between them than a married couple can.”
The panel also argued that alimony should be treated like child support, which isn’t tax-deductible for the payer or taxable for the recipient.
David George, a CPA/PFS in California, offered this opinion: “I believe the reason for the change was as a money-raising effort, since usually the payer who gets the deduction currently is in a higher tax bracket than the recipient.”
The non-partisan Joint Committee on Taxation estimates repealing the deduction will add $6.9 billion in new tax revenue over 10 years. That’s equal to less than half a percent of the $1.5 trillion tax cut plan.
Why the Worry?
If alimony is no longer deductible, the ability of an ex-spouse to pay may be limited due to other fixed expenses, such as child support payments and education expenses for children. New York attorney Malcolm S. Taub foresees future alimony recipients losing 10 to 15 percent of what they’d get under the current law. He says lawmakers are “taking money from people who’ve undergone the trauma of divorce, and they’re taking money from people at one of the worst times of their life.”
Most of us understand that divorce creates a trauma—not only for couple involved, but, most notably, for their children. Two separate families cannot live as cheaply as one. With this new tax structure, it will be difficult for divorcing couples to instantaneously make lifestyle adjustments which coincide with the necessary reduction of income to each spouse.
What About the Money?
New Jersey lawyer Madeline Marzano-Lesnevich says scrapping the alimony deduction “changes the economics of many divorces.”
As an example, let’s say high-earning Spouse A agrees to make alimony payments of $100,000 annually for 10 years to Spouse B. Spouse A might save $40,000 a year through the deduction, while Spouse B, who is in a lower tax bracket, could owe $15,000 on the $100,000.
Without the alimony deduction and tax benefit, maintenance payments to the lower-earning spouse will be smaller, says Marzano-Lesnivich. The higher-earning spouse may now be less willing to agree to lump-sum settlements because there’s no longer a discount for the tax deduction.
Divorce matters are complicated, especially in regard to financial concerns. Alimony is a matter to be resolved by an experienced and skilled divorce attorney, which is why GreeneWilsonCrow strives to offer you comprehensive legal counsel, care, and representation. Our team will ensure you and your rights are protected following the tax implications of this bill and your divorce.
For more information or to schedule a consultation, call (252) 634-9400 or visit www.greenewilson.com.
(Sources: PBS News Hour; Forbes Magazine; Associated Press; CBS News; Financial Advisor Magazine; Fox Business; and U.S. News & World Report.)