What Happened to Alimony?
This is the first of three articles that I will be posting about taxes in divorce. The first two will discuss changes in the tax bill passed by congress and signed by the president in December, 2017. That tax bill made a great many changes to your tax return, some good and some bad (I’m assuming that paying more taxes is bad.) This Article will cover changes that effect alimony.
“One tax change that will affect divorcing couples is the eventual elimination of the alimony deduction.”
Until December 31, 2018, the law is the same as it have been for 75 years. A party paying alimony can deduct it from his or her income taxes and the party receiving it has to claim that as income. That significantly affected many divorces.
For example, assume that the husband is a high wage earner and in the 33% tax bracket. Let’s assume that after the divorce, the wife is going to have significantly lower income and is in the 10% tax bracket. Let’s also assume that they agree on (or a court orders) alimony of $3,000 per month or $36,000 per year. The husband is now able to deduct that payment, thus reducing his taxes by $11,800. Although the wife has to claim that income, her additional taxes will only be $3,600. Thus between the two of them, Uncle Sam gets $8,200 less and they keep that $8,200. That is money on the table that can be negotiated between the two of them and either one can reap the benefit. For example, the husband might let the wife have the $3,600 that she would already pay and he would get the balance. This happens every year of the payments, so the total amount could be several times the annual amount. (I rounded off numbers to make the math easy.)
“For extremely high income earners, the savings can be much greater.”
Under the new tax bill for 2017, that goes away for all divorces beginning January 1, 2019. Alimony will no longer deductible by the payer, but it will also not be re portable by the payee. I can imagine a rush of divorcing couples to close out their divorces before the end of this year.
For many people, this won’t make much of a difference, but for a few it will be a big change. I predict that without this tool, it will be more difficult to arrive at a settlement in a high-dollar divorce.
If you have alimony in a decree that was entered into prior to December, 31, 2018, you can rest comfortably; the new law will not affect your deductions (or additional income.)
Many attorneys do not take taxes into account in advising clients about settlement options. Not only alimony, but the capital gain on a house and the penalty and interest in a 401(k) or IRA can greatly affect what you receive or give in a settlement, as can a lot of other provisions. This year you need to make sure that your attorney is informing you of the tax effect of your decisions and the date expiration on options; otherwise, you might not get what you thought that you were getting.