As you are all aware, Congress recently passed major changes to the tax laws. It appears that one aspect of the changes will impact divorcing couples on the issue of alimony. The initial proposal was to eliminate the alimony tax deduction for payer spouses effective January 1, 2018; however, that deadline has been extended to January 1, 2019 to allow states and courts time to adjust laws and policies to deal with the alimony changes. Please note, child support is not taxable and thus, not impacted.
For divorce cases where one spouse pays alimony and the other spouse receives alimony, there is a tax consequence for each spouse. The spouse who pays alimony will get a tax deduction for all payments made within a calendar year and at their own tax rate. For example, if a spouse pays $1,000.00 per month in alimony for a year, then that spouse will have a tax deduction of $12,000.00 at the end of the year. This means the spouse will not pay taxes on any of those dollars. In contrast, the spouse who receives that $12,000.00 will pay taxes on that money by including the alimony payments as taxable income on the spouse’s tax return. This system gives the payer spouse an incentive to pay alimony since that spouse will receive a tax break. This system also allows the receiving spouse to pay taxes on the alimony at the receiving spouse’s tax rate, which is typically much lower than the paying spouse. For divorcing couples who often need to stretch one income to cover two households, this can be a win-win situation. Under the new law, the alimony will be non-taxable to the receiving spouse and non-deductible to the paying spouse. The alimony tax laws are still in flux, so please watch for future information on this issue.
Please note, this summary is provided for general information only and should not be relied upon as tax or legal advice as I am not an accountant or tax professional. Further, the changes in alimony are not yet settled. At this time, it is not clear if or when these tax changes will be adopted and to what degree; however, these are important upcoming tax changes which we should all monitor.