The sweeping tax bill signed by President Trump in December 2017 includes major changes that are sure to affect every American when tax day arrives. For those considering a divorce, one provision in particular could mean thousands of dollars saved or lost each year.
The Alimony Reversal
According to the Census Bureau, roughly 243,000 people received alimony in 2016. Ninety-eight percent of those recipients were women. Before the tax bill became law, those who received alimony (also called spousal support) were required to report those payments as income and pay taxes on them. The spouse paying the alimony was able to deduct those payments.
The big change in the tax bill is that now the spouse paying alimony will not get a tax deduction for that amount. The spouse receiving the alimony will not pay taxes on it. This could represent big savings for women if they are on the receiving end of alimony, and increased expense for their ex-husbands!
It is important to note that this change will only apply to . All support agreements that are official before this date will remain under the previous tax rules.
Why the Change?
If the higher-earning spouse can’t take a tax deduction for alimony paid, that ultimately puts more money in the pocket of the government. A higher earning spouse will be in a higher tax bracket, which means he’ll have to pay a higher tax rate on the amount than his lower-earning wife would have had to pay.
For example, let’s say that Bob pays $30,000 a year to his ex-wife, Denise. He is a high earner and in the 35% tax bracket. Denise earns far less than Bob and is in the 12% tax bracket. If Denise pays 12% in taxes on the $30,000 she receives, the IRS will get $3,600 in April. If Bob is the one paying taxes on the amount, he’ll have to hand over $10,500. That means Uncle Sam pockets an additional $6,900 when Bob pays instead of Denise.
This change also puts alimony in line with the way child support is taxed.
What This Change Means for Divorce
Divorce attorneys and Certified Divorce Financial Analysts have been mulling over this change trying to determine how it will affect their clients. Some attorneys fear that this will end up lowering the amount of alimony higher earning spouses are willing to offer. It could also induce them to fight harder against alimony and spousal support obligations in the first place.
If you are considering divorce, it is crucial that you remember that this change doesn’t go into effect until 2019. If you expect to receive alimony and your support agreement is reached in 2018, you’ll be the one paying taxes on that income. Speak with your divorce attorney to determine if it is best to wait to finalize your support agreement until 2019.
You can also learn more about all the financial implications of divorce at the Second Saturday Divorce Workshop. Search to find a workshop near you.
Keep Reading
Do you think the law for spouses paying taxes on alimony before Dec 2018 will change?
Isn’t my former spouse already paying taxes on that money? Why am I paying taxes on alimony?
If alimony is paid in accordance with an agreement prior to 2019, then the old rules apply, and it is deductible by the payer and taxable to the recipient. Those rules did change in 2019, for new agreements after that date.
Since he gets a deduction for the alimony paid, he’s not paying taxes on that money. And the government definitely isn’t going to give him the deduction without you paying taxes on it, so that’s why you are paying taxes. You and he can certainly make a new agreement that says that he won’t get the deduction and you won’t be taxable on it, if you both agree that’s the outcome you want.
My divorce was finalized in August of 2018. The old law applies because it was before December 31, 2018, which I understand. Recently I read this on IRS.gov:
-Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from
the income of the payer spouse, or includable in the income of the receiving spouse, if made
under a divorce or separation agreement executed after Dec. 31, 2018.
This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, as long as the modification:
-changes the terms of the alimony or separate maintenance payments; and
-states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
Does that mean if my ex and I make changes today (Feb. 2021) to what he pays me and include the second part does that mean he and I would not have to claim the payment and receiving of alimony on our taxes??
If he has been making alimony payments to you under a pre-2019 agreement, which it sounds like he has, those payments are deductible by him and taxable to you, unless you provided in your support agreement that the payments were non-taxable/non-deductible. If you and he modify that agreement, then the payments continue to be deductible by him and taxable to you, unless you provide in that modification that the payments are non-taxable/non-deducible.
Hi Ms. Wall,
I got divorced in Germany he pays alimony and the taxes on that money. I have a divorce decree signed in Germany in July 2017. The alimony tax law changed in 2019, since I divorced in 2017 am I still responsible for the taxes on the alimony here in the United States?
Thank you,
Sandra B.
The new law applies to new alimony orders after 12/31/18. Since your was before that date, the old laws apply. So if you were taxable on it before, then you are taxable on it now.
My husband and i have been married for 23 years, I work in his optometric office, I have been on his payroll for 15 years on and off. His parents and my husband own our house. They paid in cash for the land 15 years ago and paid off the house for us after 8 years of us making payments, Im on the land deed but not the house. Do you think im entitled to any of the house or business?
What you are entitled to depends on the laws in your state regarding those facts. It is likely that there is a marital interest to the extent that you and he paid down the principal on the mortgage. And if his parents paid off the house as a gift to both of you (“for us”, you say) then you would have additional interest in the house, I would think. But I’m not an attorney and I don’t know the laws of your state.
My husband was to keep health insurance on me and our son until the divorce was finalized. He quit his job and lost his insurance. He did not tell me any of this because his girlfriend does not allow us contact. So for 6 months I did not have insurance and it was court ordered. He now has a job and health insurance now that the divorce is finalized. His new insurance refuses to cover me because we are divorced even though court documents say he has to keep coverage. What do I do
If he was required to provide health insurance per court order, then you will have to ask the court for some remedy, such as him paying for a policy for you.