Although divorce law is constantly evolving, one thing has remained constant for the last 75 years. Alimony was tax deductible for payers and considered taxable income for receivers. For divorces finalized after December 31, 2018, that will not be the case. Trump’s new tax law, which may soon be an issue in Don Jr.’s pending divorce, reverses the tax burden on alimony, and it’s got divorce lawyers and mediators scrambling to figure out how negotiations will work going forward. And while it might sound like a lucky break for those who stand to receive spousal support, for most it will simply mean that they receive less, even after you adjust for taxes.
The Catch
In most alimony situations, the payer is the higher earner and the payee is the lower earner, often substantially lower. That’s the point. On the surface it might sound like the change is a move toward fairness, by shifting the tax burden to the higher earner. But that’s where things get messy.
If the alimony payer is in a higher tax bracket than the person receiving it, the alimony amount itself will be taxed more. Even though the payee will no longer be the one cutting the check to the IRS, the payee may be the one who absorbs the loss. Here’s how it works.
As the higher earner, the payer is most likely in a higher tax bracket. That means, they save more in taxes than the payee will save when the burden shifts. The payer will have less income to pay from, because of the lost deduction, so they’ll be able to argue that they can’t afford to pay as much as they would with the deduction. The payee gets less, and even though they don’t have to pay taxes on their alimony, they save less than the reduction in the alimony amount.
In the end, it can amount to less money for the lower-earning ex-spouse and no benefit to the higher-earning ex-spouse who ultimately winds up spending just as much, but paying more to the government and less to their ex.
Pre-existing Agreements and Orders
Just so you know, alimony orders entered before January 1, 2019, don’t and won’t fall under the new tax law, but can be modified so that the new code applies if both parties agree. If you are currently receiving alimony and paying taxes on it, you might feel tempted to go that route, but be aware that everything said above will then apply to you. Be very careful. Have an in-depth talk with your attorney about your specific situation before seeking any changes.
To learn more about how the new tax law could affect you in your divorce, please, contact an experienced family law attorney right away.
