The landmark tax reform bill put more money into most Americans’ pockets through changes in tax rates and withholding. But it could have the opposite effect for future divorces, shrinking income at a time when it is most needed.
Under current law, spousal support is tax-deductible for the paying spouse and taxable income for the recipient. The new law reverses that equation. Without the tax deduction, and with the windfall to the recipient, the higher-earning spouse may be less generous or less willing to negotiate alimony.
Alimony provisions take effect in 2019
The Tax Cuts And Jobs Act will not affect anyone who initiates a divorce or enters a separation agreement during the remainder of 2018. But starting in January 2019:
- The paying spouse will no longer be able to deduct alimony from their taxable income
- The recipient spouse will not have to pay taxes on alimony payments
Lawmakers said they intended to make the tax system more fair for couples who are still married. Divorced spouses with alimony arrangements often pay less total taxes than their married counterparts – a dynamic termed the “divorce subsidy.”
Seems like a good deal for spouses who receive alimony. Or is it?
The new law could have unintended consequences for divorcing couples. In fact, it could result in both spouses having less income. Because of different tax rates, the high earner comes out ahead under the current system, but the recipient benefits too because there is more overall income to divide. The tax savings from the deduction encourages a healthy alimony payment to the lesser-earning spouse.
Under the new law, there will be less incentive for the paying spouse. Some experts predict that the lesser-earning spouse (typically the wife) may see 10 to 15 percent less in spousal support. This reduces the value of alimony as a bargaining chip in divorce negotiations, and may increase the likelihood of litigation. For these and other reasons, the American Association of Matrimonial Lawyers and the National Organization for Women lobbied against changing the structure of the alimony deduction.
There’s still plenty of time
Obviously, saving a few thousand dollars on taxes is not a good reason to get divorced. Also, every case is unique and the tax ramification of alimony is just one factor to consider.
But couples (or spouses acting unilaterally) who are already considering divorce may want to get the ball rolling before Dec. 31st of this year. This is particularly true if alimony would be in play because of a large disparity in their incomes and earning power.