Taxes

What’s changing under the new tax law?
The new tax law scraps a 75-year-old tax deduction for alimony payments. The new rules won’t affect anyone who divorces or signs a Separation Agreement before 2019.

Many divorce experts worry that the change will make negotiations tougher and lead to less spousal support as cash goes to taxes instead. Congressional tax writers say it’s only fair to married couples.

What’s changing? How does it work now?
In any divorce commenced after December 31, 2018, the spouse paying alimony can’t deduct it, and the spouse receiving the money no longer has
to pay taxes on it. Now, it’s the opposite. The current setup tends to preserve more money overall to allocate between spouses, helping them afford living separately.

Show me the math?
Imagine high-earning Spouse A now pays and deducts $30,000 a year in alimony. Spouse A’s income is federally taxed at 33%, so the deduction saves him $9,000.

Lower-earning Spouse B owes taxes on the alimony at a 15% rate, paying $4,500 instead of the $9,900 that would be due at Spouse A’s rate. The two have saved $5,400 between them, and Spouse A got a break that makes the payments more affordable.

How many people get alimony anyway?
Government statistic vary. The Census Bureau says 243,000 people got alimony last year, 98% of them women. The Internal Revenue Service says 361,000 taxpayers claimed they paid a total of $9.6 billion in alimony in 2015, though only 178,000 reported receiving spousal support. (The gap has irked the government for years; the IRS said in 2014 it was improving its strategies for dealing with the discrepancies.)

Child support payments are separate, and over 4.3 million people got them last year, census figures show. Some divorces involve alimony and child support.

The U.S. divorce rate peaked in the early 1980s and has kept declining since. More than 813,000 couples around the country divorced in 2014, according to federal statistics.

What are the arguments for the change?
The tax-writing House Ways and Means Committee calls the alimony deduction a “divorce subsidy”. “A divorced couple can often achieve a better tax result for payments between them than a married couple can,” the committee noted.
The panel also argued that alimony should be treated like child support, which already isn’t tax-deductible for the payer or taxable for the recipient.
Congress’s nonpartisan Joint Committee on Taxation estimates repealing the deduction will add $6.9 billion in new tax revenue over 10 years. That is equal to less than half a percent of the $1.5 trillion tax cut plan.

What are the concerns?
Critics fear that without the deduction, higher-earning spouses won’t pay as much to their exes. In any event, note that alimony is just one factor among many that will determine how any particular future divorce fares at tax time.

Usual issues are your filing status (married, filing jointly/head of household/single/married, filing separately), spousal support, and your exemptions for children. All of these issues can be worked out in a Separation Agreement, so that there will not be any confusion between the spouses which could lead to an IRS audit.