By Dane Leitner
The Tax Cuts and Jobs Act (“Act”) signed by President Trump on December 22, 2017 made many significant changes to the tax code. One of the significant changes made was to the deductibility of spousal support, otherwise known as alimony. Alimony payments used to be deductible; however, as of January 1, 2019, alimony payments are no longer deductible to the payor. Further, the alimony received by the recipient is no longer considered income, thus it is not taxable to the recipient. Any divorce decrees entered prior to December 31, 2018 are grandfathered.
So how does this affect a new divorce case? It will likely result in less money for the divided family, and more money to the IRS.
Previously, the payor could deduct the alimony, and the recipient would pay taxes on the alimony received. Generally, the payor is in a higher tax bracket than the receiving ex-spouse. So the prior law resulted in the payor’s shifting of income to a lower tax bracket, thereby resulting in a reduction in the amount of taxes paid on the amount of alimony.
Let’s look at an example to demonstrate these changes with Susie, an ex-wife who pays $10,000 per month in alimony and is in the 35% tax bracket. Tom, her ex-husband makes little earned income and, even with the alimony, is in the 24% bracket. Because the $10,000 per month alimony was considered income under the old law, Tom would pay $2400 each month in taxes and would receive $8,600 per month in actual support.
Now, let’s apply the above scenario to the current law provided by the Act. Susie must now pay 35% taxes on the $10,000 per month alimony in her higher tax bracket, because the alimony is now applied to her income tax bracket instead of the 24% Tom had to pay. This means that there is less money available to pay Tom in the form of alimony.
Under the current law the payor’s taxable income will be higher resulting in the government receiving more tax dollars. In the first scenario under the old law, Tom was paying $2400 each month in taxes on the alimony. In the second scenario under the new law, Susie now has to pay the taxes on the alimony at $3500 each month. Presuming the alimony deduction didn’t change Susie’s tax brackets in the first scenario, the difference would be $1,100 per month, or $13,200 per year. The $13,200 now goes to the IRS instead of the family!
On a side note, the current law now puts alimony payments in line with child support payments, at least from a tax perspective.
Because alimony is no longer deductible, in order for Tom to receive the same $8,600 per month in support Susie would now have to pay $13,231 instead of the original $10,000…$3,231 more per month to account for the taxes paid. In most scenarios, the payor does not have an additional $3,231 that they can pay to reach that same support figure, so they may petition to reduce the alimony payment on their end. Therefore recipients of alimony will likely receive less support as a result of the Act.
So, at first glance, a recipient of alimony may be excited because they no longer must pay taxes on the funds, but the overall amount they now receive may be less. It is important to have a knowledgeable divorce attorney representing you to analyze your specific situation and counsel you accordingly through the process to protect your interests regardless if you are the payor or the recipient.
A partner at Ward Damon, Dane E. Leitner concentrates his practice in the areas of family and marital law, civil litigation and condominium and homeowner association law. If you have questions regarding your alimony, how the tax laws affect you, or any other divorce matters, contact Dane at email@example.com or call (561) 842-3000.