Under current IRS law, spousal maintenance and alimony are deductible by the paying party and must be reported as income by the receiving party. This arrangement is advantageous to couples going through a divorce and planning to include spousal maintenance or alimony in their property settlement. The reason is, if one spouse had a significantly higher income, he or she could deduct the spousal maintenance or alimony payments from his taxes at a high rate while the lower income spouse, who received the payments would pay taxes on the payments at a lower rate. This allowed the couple to share the cost of the spousal maintenance or alimony with the federal government in the form of a tax deduction for the higher income spouse compared with the lower tax rate of the lower income spouse.
Under the new tax plan passed in late 2017, beginning in 2019, spousal maintenance or alimony payments will no longer be deductible by the payer and will not need to be reported to the IRS as income by the receiving spouse. Thus, the date when you get your divorce finalized will have a significant impact on the cost of spousal support or alimony under the new tax plan. If you are the higher earning spouse in a divorce, you may want to get your divorce decree and Agreement Incident to divorce finalized before the December 31 of 2018 if you wish to deduct spousal maintenance or alimony payments from your reported income and require the spouse who is receiving the payments to report the income on her tax return. Under the old tax law, because the lower-earning spouse is usually in a lower tax bracket after a divorce, more money stays with the divorcing couple and does not go to Uncle Sam.
Starting in 2019 the spousal maintenance or alimony deduction will no longer exist. Under the new tax law, the higher earning spouse will be required to pay all of the tax on the funds used to pay spousal maintenance or alimony and the recipient will get the payments tax-free. Therefore, if you expect to receive spousal maintenance or alimony as part of a divorce settlement or court order, you may want to delay finalizing your divorce until the beginning of 2019. However, as usual, dealing with the tax code is complicated and there are ways to negotiate a settlement that takes into account the loss of the spousal maintenance or alimony deduction. This is because when negotiating a divorce settlement, current tax considerations are factored into the settlement, and they will be factored into any settlement under the new tax law as well. This means, less alimony would likely be paid under the new tax code to correct for the loss of the tax deduction by the higher earning spouse. This is a significant development in family law, because during 2015, approximately 600,000 couples used the alimony deduction on their federal tax returns.
Under the current tax law controlling alimony or spousal maintenance, the person paying gets a tax deduction for the amount paid and the recipient must report the payments as income on her tax return. Starting in 2919, the payor gets no deduction for spousal maintenance or alimony payments and the recipient need not include the payments as income on her tax return. However, the implications of tax law are complex, so don’t rush out to get a divorce during 2018 to take advantage of the current tax laws governing spousal maintenance and alimony, because there are lots of ways to correct for this loss of the tax deduction for spousal maintenance or alimony by negotiating lower payments to compensate for the loss of the tax deduction.