Spousal Support Tax Deduction Ending Soon
Spousal support, also commonly referred to as alimony or spousal maintenance, is a payment from one spouse to another that is either ordered by the court or agreed upon between both parties as part of a final divorce settlement. Spousal support is not ordered or agreed upon in all cases, and the amount and duration of payments is dependent on the specific circumstances of the case.
In determining the amount of the spousal support payment, tax consequences are typically among the main considerations. Because alimony payments are often substantial, the ability for the payor spouse to deduct these payments has often been an important issue. Up until now, payor spouses have been able to deduct alimony payments as long as they followed IRS guidelines. In addition, recipient spouses have been required to claim the payments they receive as income on their taxes.
This all changed last year with the passage of the Tax Cut and Jobs Act (TCJA) of 2017. The TCJA was the most sweeping tax reform legislation since the 1980s. It included hundreds of changes to the tax code for both individuals and businesses. While the cuts in corporate and individual tax rates were the most publicized aspects of the bill, there are several relatively minor changes that significantly impact certain groups of people. Among them is the elimination of the tax deduction for ex-spouses who pay spousal support.
How Alimony Tax Law Changes Impact Divorcing Spouses
Under the TCJA, payor spouses are no longer able to deduct their spousal support payments on their taxes, and recipient spouses are no longer required to claim what they receive as income. At first glance, this may seem to have a binary affect in which the payor spouse is penalized, and the recipient spouse is rewarded. While it may be true that eliminating the deduction for alimony payments penalizes the payor spouse, this does not necessarily mean that the recipient spouse will benefit from the change. In actuality, this change could vastly reduce the combined income of the two spouses, which is not good for either one.
Here is an example of how this might happen. If a payor spouse earns $550,000 per year, their federal tax rate is 37%. Under the old rules, if they pay $100,000 per year in alimony to the recipient spouse (who does not earn any additional income), the income of the payor spouse is reduced to $450,000, moving them into the 35% tax bracket, and giving them a tax bill of $157,500. At the same time, the recipient spouse receives $100,000 and pays 24% in federal taxes, or $24,000.
Under the new law, the payor spouse no longer has the deduction, leaving them with a taxable income of $550,000 and a tax bill of $203,500, an increase of $46,000. Meanwhile, the recipient spouse only saves $24,000. This reduces the spouses’ combined income by $22,000. This type of change could significantly impact negotiations as many spouses might argue that they cannot afford to pay as much in alimony because the deduction was taken away.
How Does this Change Affect Current Spousal Support Agreements?
If you are already paying or receiving alimony, the changes in the TCJA will not affect you. In addition, all divorces finalized on or before December 31, 2018 will still be under the old rules. For divorces finalized on January 1, 2019 and thereafter, the new law will be in effect and payor spouses will lose their spousal support deduction.
If you are currently considering divorce, there is a very short window of time remaining to finalize the proceedings in time to benefit from the old tax laws. If the deductibility of alimony payments is a major concern for you, it is best to take action as soon as possible.
Speak with an Experienced Pensacola Family Law Attorney
Crystal Collins Spencer, Attorney at Law, has over three decades of experience representing clients in Florida who are going through a divorce. Attorney Spencer has an in-depth understanding of the issues couples must resolve during a dissolution of marriage, including spousal support. She works closely with her clients, taking the time to listen and understand their unique needs and concerns, and working tirelessly to protect their rights and interests.
Call our office today at 820-912-8080 to schedule a consultation, or you may send us a secure and confidential message through our web contact form.