How 2017's Tax Bill Changed How Alimony Is Taxed
The sweeping tax bill signed by President Trump in December 2017 included major changes sure to affect every American when Tax Day arrives. For those considering a divorce, one provision, in particular, could mean thousands of dollars saved or lost each year.
The alimony reversal
According to the Census Bureau, roughly 243,000 people received alimony in 2016. Ninety-eight percent of those recipients were women. Before the tax bill became law, those who received alimony (also called spousal support) were required to report those payments as income and pay taxes on them. The spouse paying the alimony was able to deduct those payments.
The big change in the tax bill is that now the spouse paying alimony will not get a tax deduction for that amount. The spouse receiving the alimony will not pay taxes on it. This could represent big savings for women if they are on the receiving end of alimony, and increased expense for their ex-husbands.
It is important to note that this change will only apply to support agreements reached after December 31st, 2018. All support agreements that are official before this date will remain under the previous tax rules.
Why the change?
If the higher-earning spouse can't take a tax deduction for alimony paid, that ultimately puts more money in the pocket of the government. A higher-earning spouse will be in a higher tax bracket, which means he'll have to pay a higher tax rate on the amount than his lower-earning wife would have had to pay.
For example, let's say that Bob pays $30,000 a year to his ex-wife, Denise. He is a high earner and in the 35% tax bracket. Denise earns far less than Bob and is in the 12% tax bracket. If Denise pays 12% in taxes on the $30,000 she receives, the IRS will get $3,600 in April. If Bob is the one paying taxes on the amount, he'll have to hand over $10,500. That means Uncle Sam pockets an additional $6,900 when Bob pays instead of Denise.
This change also puts alimony in line with the way child support is taxed. But, it is important to note that although these tax laws are changing on the Federal level, some states have not adopted the same stance. California is still following the old rules – tax deductibility by the payor and income to the payee (as of 11/29/2018).
What this change means for divorce
Divorce attorneys and Certified Divorce Financial Analysts have been mulling over this change trying to determine how it will affect their clients. Some attorneys fear that this will end up lowering the amount of alimony higher-earning spouses are willing to offer. It could also induce them to fight harder against alimony and spousal support obligations in the first place.
If you are considering divorce, it is crucial that you remember that this change doesn't go into effect until 2019. If you expect to receive alimony and your support agreement is reached in 2018, you'll be the one paying taxes on that income. Speak with your divorce attorney to determine if it is best to wait to finalize your support agreement until 2019.