Divorce is complicated enough. But add in the Trump tax plan, and it gets a little more complex. Previously, you could deduct spousal support payments on your federal income tax return. The receiver of spousal support also had to report these payments as taxable income. But now, effective January 1, 2019, the Trump tax plan will change the way alimony payments can be taxed.
Trump Tax Plan Eliminates Alimony Deductions
The Trump tax plan regarding spousal support applies to:
- Divorce or separation settlements or orders that are executed after December 31, 2018; or,
- Modified spousal support after December 31, 2018, but only if the modification order specifically states that the Trump tax plan applies.
If the above applies, then the payer cannot deduct alimony payments from his or her federal income tax return. On the other hand, the receiver of alimony will no longer have to include them as taxable income.
However, the alimony payments mandated by divorce or separation agreements executed prior to 2019 are unaffected.
Changes in the Law Could Mean Higher Taxes and Smaller Spousal Support Payments
The Trump tax plan could mean higher taxes and lower spousal support payments. Usually, the higher-earning spouse will pay spousal support to the lower-earning spouse. The best way to see how the new tax laws will affect you is by way of illustration.
Say the husband is the higher-earning spouse and his top marginal tax rate is 35%. The wife is the lower-earning spouse whose top marginal tax rate is 22%. Let’s say the couple’s divorce settlement decrees that the husband will pay $2000 per month in alimony.
Pursuant to the current tax laws, the husband could deduct the entirety of the $2000/month ($24,000) off the top of his income. This means the $24,000 he paid out won’t be taxed at the 35% tax rate, permitting him to save $8,400 in taxes. The wife, who must report the spousal support payments as taxable income, will be paying 22% tax rate on the $24,000 spousal support payments. Thus, she will owe the IRS $5,280.
Under the Trump tax plan, the wife will pay nothing while the husband will pay the additional $8,400 in taxes.
How Will This Affect Me?
Under the current rules, family law attorneys are able to come to a mutually agreeable settlement for spousal support. Because of the immense tax savings, the higher-earning spouse has more incentive to agree to pay higher alimony to the lesser-earning spouse. But beginning 2019, spousal support payments are likely to be lower and with more financial burden on both parties due to the tax changes. This also affects alimony payments modified after December 31, 2018.
So, for those seeking divorce, it is more likely that the higher-earning spouse will want to finalize the divorce prior to December 31, 2018, since the lower-earning spouse bears the tax burden. Contrarily, the lower-earning spouse may want the divorce finalized on or after January 1, 2019, because the higher-earning spouse bears the tax burden.
Other Things to Consider
But the tax burden should not be the only thing you should consider when thinking about divorce. For instance, if one spouse is expecting a massive payday from a business venture, the other spouse may want to wait until after the income has been earned.
Speak to a Knowledgeable Family Law Attorney
There are many issues to think about when deciding to divorce. The tax benefit/burden is just one aspect of divorce. If you are considering divorce, it is crucial that you seek sound advice from an experienced family law attorney. Call the Law Offices of Rick D. Banks today at (559) 222-4891.