The Tax Cuts and Jobs Act, signed into law December 2017, presents major changes that will significantly impact women and men going through divorce. This new tax law reverses the law introduced 77 years ago, which was created with the hope of freeing up more money for the divorcing couple and easing the transition from paying taxes jointly to separately.
Recently, the IRS decided not to be so generous and is creating a difficult situation for divorcing couples who may be already financially strapped. This new legislation will raise an additional $6.9 billion over the next decade for the government — meaning less money for divorced individuals.
The major change in the bill is around who pays taxes on spousal support. Currently, the spouse paying alimony is the one allowed to take the deduction, while the one receiving payments is taxed according to their individual income bracket.
More from FA Playbook:
Investors worst nightmares? Themselves
Yield-curve hysteria is much ado about nothing
How to figure out if you’ll be able to retire early
The new tax law makes alimony non-tax-deductible for the one paying, and the one receiving alimony will not pay tax on it. This new law will apply to divorces that are finalized after Dec. 31, 2018. Although people may file for divorce before the year is over, the divorce papers must be signed before 2019 to keep the tax break.
The tax deduction on alimony has often acted as an incentive, or “divorce subsidy,” allowing the higher-earning spouse to provide more dollars to their lower-income spouse in the form of alimony, because the payment would be tax-deductible to them. Due to the recipient paying tax at a lower rate than the payer, the recipient pays less taxes, resulting in more money for the family unit.
The deduction can save up to about 50 percent in taxes for top earners in high-tax states, such as California and New York. Therefore, for every $50,000 in alimony paid, it only costs $20,000 after-tax to the payer. The recipient, on the other hand, may only have to pay $10,000 in taxes on that $50,000. The net savings to the family is $40,000.
This “divorce subsidy” has also sometimes helped prevent the divorce from going to trial, especially when the divorce is extremely financially contentious. According to the American Academy of Matrimonial Lawyers, 95 percent of respondents expect that the new alimony rules will change how divorces are settled.
With more money going into federal coffers from the wallets of divorcing couples, a clear majority (64 percent) of matrimonial attorneys expect that the new tax code will make divorces more acrimonious. The law also may discourage many payers from agreeing to pay alimony, making a messier, complicated divorce more likely. Divorce lawyers also now fear the fallout could impact child support payments, which are often calculated in tandem with alimony settlements.
Be the first to comment