How the New Tax Cuts and Jobs Act Will Impact Alimony Payments in 2019
By Bonnie L. Alexander
As you are no doubt already aware, in 2017 Congress passed a new tax law that made sweeping changes to how individuals and businesses will pay their federal income tax. What you may not realize is that this new law will greatly affect the allocation of alimony and child support. Noting these changes, many attorneys are suggesting that their clients avoid the negative impact of the new tax law by getting their decrees by or before December 31, 2018.
As a recent article in the New York Times described this situation, “A change in the new Republican tax law will eliminate a tax break for alimony payments that are finalized after Dec. 31, prompting financial planners and lawyers to warn wealthy clients that if they have been contemplating filing for divorce, they had better act fast.”1
For the last 75 years, the U.S. tax code has allowed divorced spouses to enjoy a significant tax advantage by deducting their alimony payments from their declared taxable income. The Internal Revenue Service says about 600,000 taxpayers claim this deduction each year. On the other hand, the recipients of these payments, usually wives whose resources are generally considerably less than those of their ex-husbands, have had to pay taxes on their alimony at a rate in keeping with their overall income.
The 2017 tax cut bill has eliminated this “divorce subsidy.”
When the Republican Congress created the new Tax Cuts and Jobs Act in 2017, they interpreted the tax deduction for alimony as a “divorce subsidy” because, they reasoned, a married couple would pay more taxes on their joint income than they would as a divorced couple under the old system. Consequently, the federal government would be losing millions in revenue unless they addressed this issue as part of their attempt to reform the tax laws.
The remedy, it seems, is to reverse who can declare alimony as a tax deduction. Since the spouse who pays alimony is almost certainly in a higher tax bracket and therefore paying higher taxes than the spouse receiving alimony, this reversal is estimated to produce $7 billion more in revenue for the federal government over the next decade.
Who will benefit most from the new tax code?
In theory, the ex-spouse collecting alimony may benefit from the new law because they will no longer have to count these payments as taxable income. But in reality, many see the change as a lose-lose situation for both sides in the divorce.
According to the Times, the loss of this deduction for alimony could hurt more women than men since they are usually the recipients of alimony payments and face a higher risk of income decline after divorce than their ex-husbands. If their ex-husbands are unable to claim alimony as a tax deduction, it will no doubt make them less likely to see these payments as beneficial to their own overall financial picture. Thus, many divorce experts feel that the change in the tax structure will probably mean that less money will be available for the supported spouse. This, in turn, is likely to make the negotiations over alimony between the parties more contentious.
The new law will also impact child support. Under the current system, while child support payments are not deductible, unallocated support payments which are designed to help a divorcing spouse and children at the same time are counted as deductions. However, starting in 2019 under the new law, they will not be deductible.
Keep in mind, alimony Isn’t mandatory in Illinois.
Even though one spouse may be providing most or all of the income for a couple, that doesn’t necessarily mean the breadwinner has to share their earnings with their ex after the divorce. In Illinois, spousal maintenance is awarded only if and when the court determines that it should be. With this in mind, marrying couples might want to consider a prenuptial agreement that would outline who would be responsible for providing maintenance and how much it would be if and when the relationship ends.
The new tax law may change the way the court determines how much maintenance to award. Keep in mind, even though the recipient won’t have to pay taxes on alimony payments, the overall tax liability of the couple will increase in the government’s favor. And more taxes paid to Uncle Sam means less money for the total household. Some experts think that this may eventually result in some changes being made to the state law.
Some couples might benefit from having their divorce governed by the new law.
It may be that a couple who is already divorced feels they would benefit more from living under the new law than the former one. In that case, the new law includes a provision that allows for divorce agreements to be modified to follow the new guidelines. If you want to consider if this might be right for you, please call for an appointment so we can discuss it. Or if you have any other questions about how the new tax law may affect you, we’d be happy to review your situation.