Impact of New Tax Law on Spousal Support (Alimony)

The new Tax Cuts and Jobs Act (TCJA) (See IRS tax reform) that passed in December 2017 eliminates spousal support as a tax deduction. Agreements filed with the court before the year end of 2018 can still receive this tax benefit.

Historically, spousal support has been a deduction for the higher earner, the spouse paying support, and a treated a taxable income for the lower earner, the spouse receiving spousal support. The higher earner is typically in a higher tax bracket and therefore, receives a valuable tax benefit to claiming that deduction. The lower earner is typically in a lower tax bracket, and therefore pays a lower amount in taxes than the higher earner would pay for the same amount. The support calculations take this into consideration and effectively shares the tax benefit given to higher earner by providing an increased amount of support to the lower earner.

Simply put, both spouses gain from the tax deduction and save more money in taxes.

Some financial articles are fueling an unnecessary dispute between divorcing spouses, inaccurately stating that the benefit is only for the higher earner. This would be true if the law did not adjust the amount paid in spousal support. With the law adjusting the amount paid, removing this tax deduction is a loss for both spouses. Without this tax deduction, the law reduces the support amount that the lower earner receives, resulting in both parties receiving a net loss.

Spouses who have not yet filed for a divorce, may still start the filing process and as the law is interpreted today, may file a settlement agreement prior to the year end and be grandfathered in for the spousal support tax deduction for the life of the support. As the tax law is a significant change, tax advisors cannot guarantee how this will be interpreted down the road.

Spouses who have filed but have not completed their divorce, can file a partial settlement agreement.

In either case, you would need to act fast to gain this benefit to you both.

Spouses who have already divorced prior to the law will be grandfathered in, and not affected.

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