Congress’ massive tax overhaul is poised to affect virtually every aspect of American life—even divorce. President Donald Trump signed the Tax Cuts and Jobs Act at the beginning of the year, which includes a provision which eliminates a 75-year-old tax deduction for alimony payments.
The new rules will not take effect until 2019. Many divorce experts worry that the change will make negotiations more difficult and result in less spousal support since most the cash will go to taxes instead.
What’s Going to Change?
As of right now, the spouse paying alimony can deduct it from their taxes and the spouse receiving it has to pay income taxes on it. The current setup tends to preserve more money overall to allocate to each party, helping them afford to live separately after the divorce is finalized.
Divorce lawyers use this tax deduction as a way to make a settlement go down easier since there was more money in the pot to be able to divide.
But after December 31, 2018, the spouse paying alimony cannot deduct it, and the spouse receiving the funds no longer has to pay taxes on it.
Arguments & Concerns
The tax-writing House Ways and Means Committee considers the alimony deduction a “divorce subsidy,” stating that “a divorced couple can often achieve a better tax result for payments between them than a married couple can.” The change would allow the government to collect $6.9 billion in new revenue over 10 years.
On the other hand, critics view the repeal as taking money away from people who have experienced the trauma of divorce, especially at one of the worst times of their life. Additionally, imposing such a significant tax penalty on divorce could encourage people to stick it out and make their marriages work, which means people could be financially trapped in unhappy marriages.
Since some prenuptial agreements have spousal maintenance provisions which assume the tax deduction, it might be necessary for some states to change alimony guidelines within their laws.
For more information, contact The Virga Law Firm, P.A. today.