The new tax reform law would eliminate the tax deduction for alimony and make alimony income tax-free to the recipient for divorce decrees executed after December 31, 2018 and it wouldn't affect existing divorces.
The bottom line: The elimination of the tax deductibility of alimony means, in most cases, the government will no longer help support the spouse receiving the income, usually the former wife and the couple's children.
Tax Brackets and Divorcing Couples
Currently, in most cases, after a divorce, the spouse paying the alimony is in a considerable higher tax bracket than spouse receiving the money. The difference between these tax brackets provides a benefit to the spouse paying the alimony and an even greater benefit to the one receiving it. Essentially, the spouse receiving alimony is getting considerably more in actual dollars than the spouse paying it.
Here's an example: Say a spouse is required to pay $10,000 a month as alimony (or spousal maintenance) and is in the 50% tax bracket, including state and local taxes, and the spouse receiving the alimony is in the 30 to 35% tax bracket. A payment of $10,000 per month in alimony would result in a net payment of $5,000 a month for the spouse paying it. The spouse receiving the alimony might owe only $3,000 in tax on the money. Since the person getting the alimony would receive a net payment of $7,000 per month while the person providing it is paying only a net $5,000, the government is supporting the spouse receiving the alimony to the extent of $2,000 a month.
Why Tax Reformers Want to Change Alimony Rules
The rationale for changing the alimony rules this way would eliminate what is effectively a 'divorce subsidy' under current law, in that a divorced couple can often achieve a better tax result for payments between them than a married couple can.
The arbitrage created by the difference in tax rates has long served as a benefit to the spouse paying the alimony and has been a factor both in negotiating matrimonial settlements and in bridging the gap between the parties' needs and their actual income. Judges ruling in contested matrimonial matters typically take the tax deductibility and taxable income of alimony into account.
What the Effect Might Be on Couples Who Divorce
If alimony is no longer deductible, the ability of an ex-spouse to pay it may be limited, due to other fixed expenses, such as child support payments and education expenses for children.
Everyone understands that divorce creates a trauma not only for couple involved, but most particularly for their children. Two separated families cannot live as cheaply as one. The present tax structure helps lessen or ameliorate those burdens. It is very difficult for divorcing couples to instantaneously make lifestyle adjustments which coincide with the necessary reduction of income to each party.
Under the Tax Cuts and Jobs Act, it would clearly make a difficult and painful divorce experience more difficult and more painful.
Should you be in the midst of a divorce or contemplating divorce, contact the Law Offices of Renee Lazar either through email or telephone 978-844-4095 to schedule a FREE one hour no obligation consultation.