One provision of the new tax law scraps a 75-year-old income tax deduction, the one for alimony payments. The good news is that the change won’t affect anyone who divorces or signs a separation agreement before 2019, so hate to say — alimony payers — lets get going on that settlement!
Rightly so, many divorce experts worry that the change will complicate negotiations and will lead to less spousal support as the payor’s cash now goes to pay taxes first.
The purpose of alimony is to avoid unfair economic consequences of a divorce, generally giving the spouse who has less income a chance to get to stand on their own two feet financially, now that the marriage has ended. For divorces commenced next year, the spouse paying the alimony will now pay income taxes at their usual income tax rate. That is usually a higher income tax rate than the spouse receiving the alimony a payment. This tradition followed the long-term notion that if you didn’t get the benefit then you shouldn’t have to pay the income tax. It seems that paying alimony has become more personal in that those who now pay, somehow are receiving a personal benefit and thus pay income tax. The new law seems to have lost sight that the love between the parties has died.
Divorce lawyers say the current setup tends to preserve more money overall to allocate between spouses, helping them afford living separately after paying taxes together as a couple during their marriage. The long-term notion of having the person who receives the benefit of the income pay the tax during the dissolution and moving on in life period after the marriage ends. It was something quite helpful in settling divorce cases as the payer would pay income tax on the income if it didn’t go the former spouse as alimony.
Imagine this example: High-earning “Spouse A” now pays and deducts $30,000 a year in alimony. Spouse A’s income is federally taxed at 33 percent, so the deduction saves him $9,900.
Lower-earning “Spouse B” owes taxes on the alimony at a 15-percent rate, paying $4,500 instead of the $9,900 that would be due at Spouse A’s rate. The two have saved $5,400 between them, and Spouse A got a break that makes the payments more affordable.
The deduction saves Spouse A about $5,000 a year as the person getting the money should be the one who pays taxes on it.
Critics fear that without the deduction, higher-earning spouses won’t pay as much to their ex-spouses. Some foresee future alimony recipients losing up to 10 to 15 percent of what they’d get under the current law.