The new tax law is about to have an effect on the pocketbook of divorced or legally separated couples beginning January 1, 2019. Whether it's positive or negative depends on if you're writing the check--or cashing it. After seventy five years, alimony will no longer be deductible by the payor spouse, nor taxable to the payee--a dramatic change which will have a significant impact on divorcing couples and their ability to negotiate a fair settlement.
Alimony or spousal support in varying terms and amounts is not uncommon in divorce or legal separation when the marriage is of significant length, or where there's a substantial discrepancy in income and/or education, health issues or aging parties. It's also not unusual when a couple has preschool children, and a stay-at-home parent who cannot reasonably balance the cost of childcare with earnings.
Attorneys have used alimony tax treatment as a favorable method of equalizing household income in order to avoid impoverishing either side. Deductibility of spousal support was one of the few incentives counsel could use to entice a reluctant spouse to financially assist a lesser earning ex-partner. Payments to third parties such as mortgage or insurance will no longer be treated as support.This may seem like good news to the receiver of spousal support, but it's likely the courts will take the lack of deductibility into account when awarding alimony. Certainly mediators and financial experts, who typically "tax effect" support payments, will do so. The net effect will be that there will be less income to spread amongst two households.
Called the Tax Cuts and Jobs Act of 2017, perhaps the new law should named the Better Get a (Second) Job Act. Either the payor is going to need some extra income, or the recipient will need to supplement--or both.
Under the prior tax law, income in a divided family could be shifted to the lower income spouse who would likely be in a lesser tax bracket. The net tax effect would have reduced the overall tax burden. This was handy, as two households can never survive as cheaply as one.Beginning in 2019, alimony will be treated the same as child support--nontaxable to the recipient. The tax treatment of child support will not change.
This seems to contrary to the theme of "Tax Cuts." So what was Congress' rationale? The House Ways and Means Committee termed the alimony deduction a “divorce subsidy.” “A divorced couple can often achieve a better tax result for payments between them than a married couple can.”
To counterbalance, family law practitioners may try to negotiate a reallocation of the Child Tax Credit. The Act provides for a temporary increase to $2,000 per qualifying child as well as a $500 nonrefundable credit for qualifying dependents other than qualifying children. So, if it looks like you are about to pay alimony, hope that
your decree is signed before the end of 2018 or that your lower earning spouse hits the lottery.
December's going to be very busy.
MORE ABOUT THE MONEY:
The Cost of Divorce
It's Not About the Money!