The Alimony Tax Deduction Is Gone. Now What?
If you’re in the process of negotiating or navigating divorce and you’re anticipating taking advantage of the alimony tax deduction, we have bad news for you – as of Dec. 31, 2018, that deduction will no longer be available to you. If you are anticipating being on the paying end of spousal support, not only can you no longer deduct the amount you’ll be paying, but your soon-to-be-ex has now gotten something of a windfall, as they will no longer have to report what you pay them as taxable income.
If that hardly seems fair to you, you’re not alone. The change is part of the tax reform act, and though the end result for you may mean that the payments you make are going to hurt worse, it’s part of what funded the corporate tax cuts that are supposed to boost the nation’s economy. According to tax experts, the impact for divorcing couples will be less money available for your collective households, but for the government, it means higher tax receipts.
If you’re not clear on how that works, it’s actually fairly straightforward. The spouse who earns a higher income is the one who pays spousal support and pays higher taxes. The spouse receiving spousal support generally pays taxes at a lower rate. By eliminating the deduction, the government can tax more of the higher earner’s income. The receiving spouse’s taxes are worth less to the government than the paying spouse’s taxes are.
According to experts in divorce law, the change is probably going to create a significant shift in the way that divorce settlements are negotiated, as higher-earning spouses will be reducing the amount of money that they are willing to pay to reflect the loss of their write-off, as well as the fact that their spouse will be receiving tax-free income. Divorce attorneys will likely have to calculate what the net difference is for each and make adjustments to the settlements that they propose and agree to in the interest of parity. The loss of the deduction will mean that the paying spouse has less money to give.
Though the alimony tax deduction is no longer available, mediation and negotiation can still lead to a fair agreement. Contact us today to learn how we can help.