The current structure tax structure for paying alimony
Currently, the person who is making the alimony payment is allowed to deduct the payment from their income tax. The person who is receiving the alimony payments is responsible to pay income tax on the alimony payments received.
Disappearing Money & The “Divorce Discount”
Because the person making payments has the higher income, they are typically in the higher tax bracket. As a result, the tax responsibility is effectively moved into a lower tax bracket so the government receives less money than if the PAYER of the alimony was responsible for the tax liability. This concept is sometimes referred to as the “Divorce Discount” because the total tax liability of a married couple typically decreases if they get divorced.
There is also a lot of money that disappears through the alimony payment process. In 2015, 361,000 people claimed an alimony tax deduction to the tune of $9.6 Billion. However, only 178,000 people report receiving alimony payments. That means almost half of alimony payments that are written off never end up showing up on any income tax return.
The New Tax Law and The End of the Alimony Deduction
The end of the alimony deduction essentially means that the spouse who pays out alimony will also be the person responsible for paying the income tax on the alimony as they can no longer deduct it. This will likely result in smaller alimony amounts but the spouse receiving alimony payments will no longer be required to pay taxes on the payments they receive.
The new tax law will only affect people who have their divorce finalized after December 31st, 2018. It will also affect people who make adjustments to their alimony after December 31st 2018.
“My husband’s check went up after the new tax law; can I have my child support or alimony reviewed?”
Another result of the recent change in the tax code is that both business owners with “pass through busines
s” and people in higher tax brackets are seeing more take-home pay. While the amount of their checks may have increased, the support is based on your gross pay, not your take home pay.
An end of the Year Rush
For most divorcing couples, this new tax law is going to mean either a higher tax liability for the person paying alimony, or lower support payments for the spouse receiving alimony. That means people are likely going to be rushing to finalize their divorce, or any review of spousal support, before the effective date of the law change, which is December 31st of 2018.
If you are considering divorce and are concerned with how this change in the tax law will affect you, I can help you understand what to expect. If you are looking at reviewing or making changes to an existing alimony agreement, getting it completed in 2018 instead of waiting and being subject to the new rules will likely save you and your spouse a lot of money in your overall tax liability.