Spousal support payments likely to change with new tax law

This article looks at how the elimination of the alimony deduction will change spousal support payments.

Spousal maintenance (also called spousal support or alimony) is often granted on a temporary basis until a divorce is finalized when there is a significant income disparity between both spouses. Even after a divorce is finalized, the high-earning spouse may still be required to pay spousal maintenance, especially if the recipient is unable to support him or herself and the marriage lasted for at least 10 years. However, as Politico reports, spousal maintenance amounts could be set to change once key provisions of the recently passed federal tax reform go into effect.

What do taxes have to do with divorce?

The reason the new tax law, called the Tax Cuts and Jobs Act, is likely to have a big effect on spousal maintenance and on divorce in general is because it eliminates the alimony deduction. Added in 1942, the alimony deduction allows those paying alimony to deduct the payments on their federal taxes. The deduction was introduced on the assumption that it wasn't fair that people pay taxes on money that they weren't actually receiving.

Recipients of spousal maintenance, on the other hand, are the ones that are required to pay taxes on it. This too will change with the new tax law, however, and recipients will no longer be required to pay taxes on spousal maintenance payments. While much of the Tax Cuts and Jobs Act went into effect at the beginning of the year, the changes to alimony payments will only apply to divorces that are finalized after December 31, 2018.

How the changes hurt both parties

While the fact that recipients will no longer have to pay federal taxes on spousal maintenance payments may sound like a tax break, in fact it is likely that those recipients will end up receiving even less spousal maintenance than they did before the tax law was passed. That's because, as PBS Newshour reports, the current alimony deduction means that the high-earning spouse, because he or she is typically in a higher tax bracket, earns a larger deduction on the spousal maintenance payments than what the recipient pays in income taxes. As a result, the party paying the spousal maintenance is able to offer higher payment amounts knowing that he or she will get much of it back through tax deductions.

With that deduction being eliminated, there will be less wiggle room for those paying spousal maintenance. As a result, recipients are likely to have a harder time negotiating larger maintenance amounts. Furthermore, it is unclear how the new law affects current prenuptial agreements that were written under the presumption that spousal support payments could be deducted.

Family law help

As mentioned above, the changes to the alimony deduction only take effect at the start of 2019. While nobody divorces because of tax deductions, the changes are important for those who are currently in the middle of divorce negotiations to keep in mind since the final outcome of their divorce could look very different depending on whether it is finalized this year or next year. Anybody considering a divorce should talk to a family law attorney for help. An experienced attorney can assist clients with various aspects of their divorce case, including with spousal maintenance payments.