Tax Reform & Alimony: Impact of Federal Tax Law on Your Divorce
Updated: Mar 5, 2019
As the new tax bill takes effect, there are many deductions taxpayers will miss in 2018 on both the corporate and individual levels. Arguably one of the most substantial changes in the bill is how the IRS views alimony, which will likely have a direct impact on your divorce case.
Under current tax laws, alimony is deducible by the payer (typically the higher-income earning spouse) and taxable to the payee (the lower income-earning spouse). Overall, the tax-saving benefits of this structure are passed on to both parties, as taxable income is shifted to a lower income bracket for all parties involved.
The elimination of the alimony deduction under the new Federal law will have lasting effects on divorce matters occurring after 2018. Should a party be ordered to pay spousal support in a divorce settlement beginning in 2019, the payer will have significantly less after-tax dollars to provide payments.
The new law will also affect alimony recipients in indirect ways. Many times, support payments are utilized in negotiations to offset the receipt of larger property settlements. The payer will now have less incentive to provide more substantial spousal support payments, potentially decreasing the number of cases resolved by private negotiation and settlement.
Should parties be unable to reach a private resolution, courts can order alimony to be paid based on income disparity. Taking the impact of the tax deduction into account, courts may order lower spousal support obligations to compensate for the lower after-tax income of payee.
One of the last-minute changes to the tax bill moves back the effective date for the termination of the alimony deduction from the start of 2018 to the start of 2019, meaning your support obligations may not change should your matter be finalized prior to the effective date.
Finding the right attorney to help you navigate the intricacies of divorce and alimony is an essential first step. Your attorney should be knowledgeable about how the tax reform may affect your case should you go forward with a post-decree modification in the future.
For guidance on how to find a reputable divorce attorney, please visit our post on “Finding the Right Divorce Attorney.”