Under Trump’s Tax Cuts and Jobs Act, alimony (aka spousal support) will no longer be tax deductible to the payor, or taxable to the recipient. This provision would affect all divorce and separation agreements signed after December 31, 2018.
The new provision is found in page 100 of the bill (I attached the text above). Specifically,it is a Repeal of the alimony deduction that has been in place for over 75 years ( see sec. 1309 of the House bill and secs. 61, 71, and 215 of the Code).
Wowzers. For as long as I have been practicing Family Law, spousal support has been tax-deductible to the payor and treated differently than child support. And recipients would pay income taxes on it. World turned upside down!
The elimination of the spousal support tax deduction will affect a lot of people – according to the IRS, approximately 600,000+ Americans claim a spousal support deduction on their tax returns, totaling 12.3 billion. As of the 2015 data, 98% of the recipients of alimony are women.
Why did Congress do this? What’s the point? Well, allowing alimony deductions historically shielded funds from Uncle Sam. Example: Husband pays $40,000 a year in alimony. He is in the 33% tax bracket, so deducting this amount from his income saves him $13,200. Wife on the other hand doesn’t work. Thus, the$40,000 she receives puts her mostly in the 15% tax bracket, where she is taxed 15% on the $40,000 received, or $6,000 instead of the $13,200 husband has to pay. This saves the couple $7,200, shielding them from Uncle Sam.
One of the many tax committees voting to repeal this tax deduction called the alimony deduction a “divorce subsidy”, and argued that divorced couples are treated BETTER tax-wise than married couples. Another committee estimates that repealing the alimony deduction will put 6.9 BILLION in new tax revenue over 10 years.
Treating spousal support like child support can be good and bad, depending on whether you are the payor or recipient.
So how does this affect you and me? Well, if your divorce is not final, and you are currently paying alimony and getting a lot of benefits from alimony deductions, it would behoove you to settle your case AS SOON AS POSSIBLE – before this law goes into effect.
Also, as always, I recommend mediation over litigation in resolving all of your conflicts. It’s possible to find resolution without fighting. Best of luck in this new year!