New Tax Bill Eliminates Alimony Deduction in Divorces in 2019
As of January 1, 2019, the alimony tax deduction will cease to exist. This means that alimony paid by a spouse will no longer be tax deductible. Further, the spouse receiving alimony will no longer claim it as income. Currently, alimony is tax deductible to the paying spouse and taxed as income to the receiving spouse. The new law will not take place until January 1, 2019, giving couples that desire to get divorced time to file before the new tax law takes effect. However, the spouse requesting alimony may have significant incentive to delay the divorce in order to get the 2019 tax benefit. Obviously, the spouse paying alimony will try to rush to finalize the divorce in order to receive the 2018 alimony deduction.
The change in the alimony tax law will have a significant impact on how divorces are handled moving forward. Previously in divorces, the tax deduction was utilized by the spouse paying alimony to gain a significant tax advantage since he or she was typically in a higher tax bracket. For example, if a spouse was to pay $10,000 per month in alimony or $120,000 per year and was taxed at about 40%, the paying spouse would receive an off the top deduction. This means that the paying spouse would only be out $6,000 per month or $72,000 per year. In other words, the paying spouse receives a significant tax benefit on the money paid. The recipient spouse would then end up with $102,000 per year or $8,500 per month after paying a tax rate of 15%. Under the new tax bill, these deductions would all be eliminated.
As of January 1, 2019, alimony paid by one spouse to the other will not be tax deductible, and the spouse receiving the alimony will no longer have to pay taxes on it. Utilizing the same example as above, the paying spouse will pay $10,000 per month and receive no tax deduction. Further, the receiving spouse would receive $10,000 per month without it being taxed as income. While this may seem like a simple solution, it will most likely result in significant reduction in the amount of alimony awarded given that alimony will no longer be an off the top deduction for the paying spouse. A spouse paying alimony who previously may have been able to afford $10,000 per month, under the new plan that same spouse may only be able to afford $6000 per month given the loss of the tax benefit. In the end, the government ultimately takes a much larger portion of the funds as taxes leaving less money between the spouses for alimony. Congress’s nonpartisan Joint Committee on Taxation estimates repealing the deduction will add $6.9 billion in new tax revenue over 10 years.
As the elimination of the alimony deductions becomes effective in 2019, many divorce experts anticipate that divorce filings will rise in 2018 as spouses try to capitalize on the tax deduction before the new bill goes into place.