On December 22, 2017, President Trump signed the new tax bill into law. It’s been called the largest tax overhaul in 31 years, and has far reaching financial implications for businesses and individuals alike. Like all changes to tax law, there are those who stand to benefit and those who stand to lose out. For couples contemplating or in the settlement stages of a divorce, the financial impact of the law can be substantial due to changes in the alimony (spousal maintenance) tax deductions that have been on the books for the past 75 years.
Eliminating Alimony Tax Deductions
Prior to the new tax bill, divorced or separated persons paying alimony were allowed to deduct the amount paid from their taxable income, and divorced or separated persons receiving alimony payments were required to include the amount they received as taxable income. The new law reverses this. Payers will no longer be able to use alimony as a tax deduction, and payees will no longer be required to report alimony payments as taxable income.
Who Won’t Be Impacted
If your separation agreement or divorce was (or will be) finalized prior to December 31, 2018, the new law does not apply to you; in effect, you are grandfathered in under the current law. The new provision also does not apply to Child Support, which will continue being nontaxable for the recipient and nondeductible for the payer.
Arguments and Concerns
Proponents of the change argue that the change is a benefit to the person receiving alimony payments, the person most in need of the financial assistance, since they won’t need to pay any taxes on it. Basically, it is a form of tax relief for those typically in a lower income bracket already. It’s also estimated that eliminating the alimony deduction will add 6-8 billion dollars to tax revenue collected over the next 10 years.
Those who oppose the change argue that there could be unintended consequences for persons receiving alimony payments. That is because the amount of alimony decided upon by the courts takes into account the amount of money available to both parties in the divorce. By having the person in the higher income bracket pay the taxes on the payment amount, which will be the case under the new law, the amount of money that goes to the government increases. That leaves less money to divide between the two parties in the divorce, so you will likely see the courts adjusting how much the high-earning will be required to pay the low-earning spouse; i.e., less money for the person most in need of the financial assistance. Opponents to the change claim the only financial benefactor under the new law is the government.
If you are facing a divorce, call us at 585-232-1415 to learn how the changes to the tax law can potentially impact your proceedings. As your matrimonial and divorce attorneys, we can help you and your spouse come to a financial resolution that is equitable to both parties – regardless of what laws are in effect at the time of your divorce.