Under current law, a divorced couple is able to share the cost of alimony or spousal maintenance with the IRS. For instance, when the higher earning spouse pays alimony or spousal maintenance, that spouse may deduct those payment at that spouse’s higher rate. At the same time, the lower income spouse receiving the payments reports that income and pays that tax at a lower tax rate.
Beginning January 1, 2019 all that changes. An important part of the 2017 Tax Cuts and Jobs Act will go into effect thus undoing this arrangement. Under the new tax plan, alimony or spousal maintenance will no longer be deductible by the paying spouse, and the receiving spouse will not be required to report those payments as income. In short, spousal support will be considered tax-free income for those receiving it, and a nondeductible expense for those who pay it.
After January, 2019, the date a divorce becomes important, potentially impacting negotiations for property settlement involving such payments. On the other hand, the attorneys for the divorcing spouses may negotiate a property settlement in a way that takes into account, or offsets, these significant tax changes. In any case, once the new law takes effect, the receiving spouse receives alimony or spousal maintenance payments tax-free, while the paying spouses pays taxes on those funds (not deductible).
For any divorces finalized before the new year that seek to modify the support arrangement after the new year, the parties may be able to agree to be subject to the old law, so long as it is explicitly mentioned so in the modified order.
Contact the Hardy Law Group today if you are seeking a divorce or modification of a divorce involving alimony or spousal maintenance.