Tax Reform Bill 2018 – Alimony Paying Spouses Take Another Hit

Q.   Why did Congress revoke the tax deduction for taxpayers who dutifully pay Spousal Support?

 

A little-discussed section of the tax reform bill passed by Congress and signed into law by President Trump last December changed the 75 year old tax code that allowed the person who pays alimony (spousal support) to deduct those payments from their gross taxable income, and required the person who receives the alimony to report those payments as taxable income. 

Under the new tax code, beginning in 2019, alimony payments will be tax-free to the recipients, and no longer deductible by those paying the alimony.  A heavy financial blow to the taxpayer who is already paying all of that alimony.

 

Congress identified what they felt were 2 problems with the very fair and reasonable old rule.  First, nearly one-half of the ex-spouses receiving alimony failed to report that taxable income and failed to pay any tax on it.  Nearly 360,000 taxpayers claimed $9.6 billion in tax deductions for the alimony payments that they had made in 2015, but only 178,000 taxpayers reported receiving those alimony payments.  Nearly $5,000,000,000.00 of taxable income went unreported by alimony recipients.  Congress and the President wanted tax dollars on this income, even if it does not come from the person actually getting the income.

 

Second, the majority of those paying the alimony were in a 33% or higher tax bracket, while the majority of those receiving alimony were in a 15-25% tax bracket.  Congress went after the taxpayer with the higher tax bracket, rather than going after the tax dodgers.

 

Congress chose to tax the ex-spouses that are paying the alimony, rather than receiving.  It is like charging the employer income tax on the salary they pay their employees, rather than taxing the person that is getting paid.  The decision to go after the alimony payer will effectively lead to a one- third increase in alimony costs. 

Alimony will be paid with “after-tax” dollars, but the person receiving alimony will not have to pay a dime of tax on that income.  Nice tax-free income for the recipient, but a real rip for the one that just keeps paying and paying.

 

A lot of people, even attorneys, and Judges do not know about this change in the tax code.  It will be important to consider the reversed position on taxing spousal support when negotiating or litigating your divorce. 

The tax code change significantly increases the burden on the party paying the support and increases the benefit of spousal support to the recipient. 

There is some good news for the spouses being ordered to pay Alimony (Spousal Support).  If you get divorced before December 31, 2018, you will still get to deduct your Alimony payments.  And your right to that deduction will be grandfathered-in even after the new tax law goes into effect on January 1, 2019.   Also, if you are already divorced and paying alimony, your right to deduct those payments will continue into the future.
 
So, if you are thinking about divorce, and you think you will be ordered to pay Alimony, it may be to your benefit to get divorced before the end of the year, and save your tax deduction.  It will save you a lot of money.  But be aware, a smart spouse will try to drag the divorce into the new year to dodge being required to report Alimony as taxable income.  Tax-free Alimony will look good to them.  It is important to discuss this issue with your divorce attorney and develop a plan of attack.