The Tax Cut and Reform Bill passed in late December, shaking up tax brackets and deductions. The changes are the most significant changes to the tax code in decades. Among the changes is the loss of key deduction for individuals paying spousal maintenance/alimony.
Alimony payments are designed to facilitate the transition into life after divorce by providing financial support to the spouse who either earned less or was not working at all. There are a number of factors that may be considered when considering alimony, including the length of the marriage, the age of the parties, their education levels and ability to support themselves.
Alimony is not mandatory in divorce; it is discretionary. Until now, it has carried certain benefits, which have facilitated the settlement process. Alimony has benefited the recipient spouse by enabling them to receive additional income that was taxed at a lower rate than ordinary income. The obligor also benefited by being able to deduct alimony.
Tax law changes will impact high earning divorces the most
The changes to the tax laws will undoubtedly have an impact on divorces of high-net worth individuals with significant assets. The elimination deduction may cause some spouses to push harder for lower alimony payments. Recipient spouses may have to fight harder to obtain the support they need.
Fortunately, divorcing individuals have some time to work out a solution. The change in alimony deductions go into effect December 31, 2018.
Divorcing individuals are encouraged to consult with a knowledgeable divorce attorney who can advise them about different maintenance and support options and the tax implications associated with each solution.