By: Cathleen Winter, Esquire
Many questions arise following the final tax bill that was revealed on December 15, 2017. One important area of concern is whether the tax bill for the new year will affect alimony. Under current law, alimony payments are deductible by the payor and count as income to the recipient. The ability for alimony to be tax deductible by the payor is often a major factor in negotiating a settlement as the paying spouse is often more willing to pay the receiving spouse more per month in alimony when such payments are deductible on taxes. Both parties win. However, the recent tax overhaul changes this dynamic.
According to Adam T. Magill, MBA, CBA, CVA, MAFF of Valuation & Litigation Services, LLC, “the final tax bill includes the repeal of alimony. According to the interpretation by the committee, alimony is all non-taxable (neither includible nor deductible).” This effectively shifts the tax burden from the payee to the payor.
The conference agreement on the final tax bill regarding the repeal of deductions for alimony payments and inclusions in gross income will take effect for divorce or separation agreements signed after December 31, 2018. Additionally, the final tax bill will also affect divorce or separation agreements signed on or before December 31, 2018 and modified after that date, if modifications expressly state that the provisions of the final tax bill apply. See the full text of the bill here.
An example:
Imagine Spouse A, who is higher-earning, pays and deducts $2,500 a month in alimony to Spouse B (Spouse A deducts a total of $30,000 a year in alimony). Spouse A’s income is federally taxed at 33%, so the deduction saves him $9,900 because it lowers his tax rate.
Spouse B, who is lower-earning, then owes taxes on the alimony payments received at a rate of 15%, paying $4,500 instead of the $9,900 that would be due at Spouse A’s rate. The two have saved $5,400 between them, Spouse A received a break that made the alimony payments more affordable, and Spouse B received higher alimony payments each month.
With the new tax reform, Spouse A would no longer be able to deduct alimony payments, meaning it would cost him or her more per year. Additionally, under this scenario, Spouse B would still get the $30,000 a year in alimony and would be unaffected by the new tax reform as Spouse B would not need to pay taxes on the alimony payments received since alimony would no longer count as income. In real life, however, Spouse A would be reluctant to pay $2,500 a month in alimony and may only offer $2,000 a month during settlement negotiations. Both spouses lose.
There’s still time!
The consequences of the new tax overhaul bill are far-reaching. For those considering divorce, or are currently undergoing negotiations, there is still time to be grandfathered into existing law that would allow for alimony deductions. Contact the Rebecca L. Palmer Law Group to learn more at (407) 757-2883. We’re here for you.
