Historically, spousal support payments (a/k/a alimony) have been tax deductible for the payor and taxable income for the recipient. The Tax Cuts and Job Act (TCJA) passed by Congress changes all that for new divorces granted starting January 1, 2019. Starting in 2019, spousal support payments made under new divorce judgments will no longer be tax deductible for the payor, and the recipient will no longer pay taxes on the spousal support he or she receives.
Why does this matter? This matters because usually the person paying spousal support has a higher income, so he or she pays a higher tax rate than the recipient. If the payor has to pay more taxes on his or her income, more money goes to the government and less is available for the family. Here is an example that shows what could happen. Imagine that Jack pays $20,000 a year in spousal support payments to Diane. Jack makes enough that he is in the Federal income tax bracket of 24%. Diane makes less money, so her tax rate is 12%. If Jack pays Federal income tax on the $20,000, $5,000 goes to the government. If Diane pays the Federal income tax, then only $2,400 goes to the government. So starting in 2019, this family would have $2,600 less in after-tax income because Jack is paying more in income tax. On the other hand, Diane now has $20,000 that she does not have to pay any taxes on, which effectively increases her spousal support award by the amount she used to pay in taxes.
What if you are already divorced and paying spousal support? Don’t worry because this change does not apply to you unless you end up back in court. If you have an existing divorce judgment, but you end up back in court after January 1, 2019, the court could order that the new spousal support payments will not have the old tax treatment, or the parties could come to an agreement that they do not want the old tax rule to apply.
What can you do if you’re thinking about filing for divorce and want the old tax rules to apply? This goes without saying, but you should talk to a lawyer about your options and how this tax change would affect you and your family. 2019 is coming up fast, so, if you think you and your spouse can come to a quick agreement to divorce and get in front of a judge before the end of the year, you may want to consider filing for divorce sooner rather than later. You should also be aware that there is also a 60-day waiting period between the time of service and when a divorce can be finalized. From the other side, if you think that you would prefer the new tax rules to apply to spousal support payments, then delaying a divorce judgment into 2019 may be your preference. Each family and each case is different.
This article is not legal advice but should be considered as general guidance in the area of family law. You can contact us at 207.784.3200. Skelton Taintor & Abbott is a full service law firm providing legal services to individuals, companies, and municipalities throughout Maine. It has been in operation since its founding in 1853.