A little known section of the new 2018 tax law dramatically changes one of the most common elements in divorce: alimony. According to CBS, this change will affect over 600,000 divorced individuals. Prior to December 22, 2017, alimony was considered to be tax-deductible for the payor and taxable income to the ex-spouse receiving it. As an example, if one spouse was earning $100,000 and paying $20,000 in alimony, he/she would be able to deduct the $20,000 alimony from their income and lower their overall taxable income to $80,000. This was a key benefit to payers. Often, it was more attractive to agree to an alimony payment in lieu of giving up more in assets to balance large differences in income. Now, the payor must pay $20,000 in alimony, but will be taxed on his/her full income of $100,000.
For the spouse receiving alimony, these payments used to be considered income for Federal and State tax purposes. The significance of this is that if the spouse receiving alimony was awarded $20,000 per year, the real value of those alimony payments might be between $15,000 and $18,000, depending on their marginal income tax bracket. The new law ensures they will receive the full $20,000, a better deal, for sure.
Did the Congress and Senate have a soft spot in their hearts for people receiving alimony? Probably not. The fact is, people who pay alimony earn more than people who receive it, and eliminating the deductibility of alimony means far more current income for the IRS. It sounds cynical, but it’s true. The net result may be that couples may explore alternative ways to balance significant differences in income under the 2018 tax law. The new tax treatment will kick in for divorces finalized after December 31, 2018.