The tax bill signed into law on December 22, 2017 by the president have a big change to how alimony has been treated for decades. Up until this goes into affect, the law has been that alimony payments may be deducted by the paying party from taxes (thus reducing their income they are taxed on) and included as income to the recipient. This created a dynamic where taxes could be saved by moving income to a person that was in a lower tax bracket. No longer.
Now, in any divorce commenced after Dec. 31, 2018, the spouse paying alimony can’t deduct it from their income, and the spouse receiving the money no longer has include it in income and pay taxes on it. Now, it’s the opposite. Now it is treated the same way as child support, which has never been deductible by the payor and taxable to the recipient.
The alimony tax laws have traditionally tended to preserve more money to allocate between spouses, helping them afford living separately. No longer.
Let’s consider a situation under the old law where a spouse pays and deducts $30,000 a year in alimony to his ex wife. If his income is federally taxed at 33 percent, the deduction saves him $9,900 per year.
If the ex wife is at a 15-percent rate, paying $4,500 instead of the $9,900 that would be due to her ex’s income tax rate. The two have saved $5,400 between them, and the ex husband got a break that makes the alimony payments more affordable.
Under the new law, this will no longer be the case, and part of that is the reason that the House Ways and Means Committee called the alimony deduction a “divorce subsidy ” and said that “a divorced couple can often achieve a better tax result for payments between them than a married couple can.”
These new alimony changes start in 2019. More details to come.