The Tax Cut and Reform Bill Changes how Alimony, or Spousal Support, is treated.
When President Trump signed the Tax Cut and Reform Bill on December 22, 2017, he effectively made the biggest tax overhaul since 1986. All Americans can expect to see changes to their taxes, but those who are getting divorced or thinking about divorce have some additional issues to consider, particularly regarding alimony (or “spousal support” here in Louisiana) and how it will be taxed.
How will 2018’s New Tax Law Affect Alimony?
Prior to the new law, alimony was tax deductible by the payor and taxable to the payee. So, the person who paid alimony or spousal support paid using pretax dollars, which they could then deduct on their taxes.
Under the new tax law, for divorces finalized in 2019 or later, the payor will no longer be allowed to deduct the payment of alimony and the spouse that receives the payment does not need to claim the payments as income on their taxes.
Generally speaking, the person paying alimony is the one with the higher income, therefore they are taxed at a higher rate. The receiving spouse, typically the lower earner, is taxed at a lower tax rate. Under the old rule, the alimony dollars were taxed less leaving more dollars available. Under the new tax law, there will be more taxes to pay.
How does this affect settlement?
Alimony is seen as both an incentive to the payor during divorce and as a helpful settlement tool for those attempting to avoid a trial. For those wishing to avoid the implications of the new tax law, there’s still time. If a divorce is filed before January 1, 2019, the old rules still apply. After that, the new tax law will unavoidably reduce the amount of cash available to settle a case using alimony or spousal support as incentive.
If you are interested in discussing additional effects of the new tax laws on your pending divorce or if you have other questions about alimony, spousal support, or divorce in general, please get in touch with one of the experienced family law attorneys at Stanley-Wallace Law.