The Republican-led tax overhaul, the Tax Cuts and Jobs Act, is poised to change a number of deductions, some of which will affect the nature of divorce in the United States. For starters, one provision in the tax overhaul will remove a 75-year-old tax deduction for alimony payments. But the new rules won’t kick in until 2019, so spouses who file for divorce or sign a separation agreement have two more years to qualify for the deduction.
Several divorce experts have expressed concern that the change will throw a wrench in divorce negotiations, possibly leading to less spousal support as cash goes to taxes.
We take a quick look at the facts of this tax change.
No More Deductions After 2018
At present, spouses paying alimony can file it as a tax deduction, while spouses receiving alimony have to pay income taxes on payments. Under Congress’ new tax plan, in any divorce or separation finalized after December 31, 2018, the spouse paying spousal support can no longer deduct alimony from their taxes, while spouses receiving alimony no longer have to pay taxes on it.
According to divorce attorneys, the existing setup makes it easier to preserve more money to divide between spouses, helping them make ends meet.
Lower-Income Couples to be Affected Most
The removal of the tax deduction could make ending marriages a longer and more expensive process, which can be particularly painful for lower-income couples.
Whereas wealthy people can afford higher taxes on spousal support, for lower-income couples with limited means, $200 to $300 a month is enough to make a difference in their quality of life. It’s money that could go to food, car payments, and other bills.
Benefits of the Change, According to Supporters
According to the tax-writing House Ways and Means Committee, the alimony deduction is a “divorce subsidy,” further adding that spousal support should be considered similar to child support, which is not tax-deductible for payers nor taxable for recipients.
Repealing the alimony deduction is also estimated to increase the country’s tax coffers by $6.9 billion over the next 10 years, as per Congress’ Joint Committee on Taxation.
Critics expressed concern that without the deduction, higher-earning spouses will no longer pay as much to their ex-spouses. Some divorce lawyers believe the change is equivalent to lawmakers taking money away from people who have suffered the trauma of divorce. As for the House Ways and Means Committee’s argument that the deduction is a “divorce subsidy,” divorce lawyers pointed out that no one gets divorced for tax reasons.
According to the Census Bureau, more than 240,000 people received alimony in 2016, 98 percent of whom were women. The IRS says over 360,00 taxpayers claimed to have paid $9.6 billion in alimony in 2015, although only 178,000 people reported having received spousal support—a discrepancy that has concerned lawmakers for years.
If you, or a loved one, are thinking about divorcing, schedule a consultation with family law attorney Daniella Lyttle to discuss your legal options. Call the Lyttle Law Firm today to find out how we can help you at (512) 215-5225.