If you already have an alimony provision in your divorce decree and/or executed Marital Settlement Agreement (also known as Separation and Property Settlement Agreements), then the 2017 Tax Cuts & Jobs Act will not affect whether that alimony is tax deductible to the spouse or ex-spouse paying alimony or whether alimony is taxable income to the spouse or ex-spouse receiving alimony.
However, the 2017 Tax Cuts & Jobs Act will impact the deductibility of alimony that is provided by a written agreement or court order dated after December 31, 2018.
Currently, alimony is generally deductible by the person who is paying alimony and it is taxable income to the person who is receiving alimony. This tax structure related to alimony allows a divorced couple to pay less as a unit in taxes and thus reduces the tax burden on the family as a whole in many instances making these additional resources available for allocation between the parties at separation or divorce.
The Alimony Process
For example, if the higher-earning Spouse X now pays and deducts $48,000 a year in alimony and is federally taxed at a 33 percent rate, the deduction potentially saves Spouse X as much as $15,840. The lower-earning Spouse Y will owe taxes on the alimony and, if Spouse Y is taxed at a 15-percent rate, then Spouse Y will pay $7,200 in taxes. Thus, the two spouses as a unit will have reduced their tax burden by $8,640.00
The alimony deduction helped settle many a divorce case because paying alimony is more attractive to divorcing higher-earning spouses when they can report the alimony as a deduction. Further, as shown in the provided example, the alimony deduction provides a way for a divorcing couple to stretch out their dollars more and provide for two households. Obviously, supporting two households is often more expensive than supporting one household, so the alimony deduction was very helpful to some divorcing couples.
For all divorce cases that are settled or litigated after December 31, 2018, those benefits of an alimony provision will no longer be available. It is important to remember that the tax consequences of alimony will change after December 31, 2018, especially if you’re contemplating a divorce or are in the midst of a divorce case or negotiations now or are seeking to modify an existing agreement or court order.
If you would like to learn more about the 2017 Tax Cuts & Jobs Act’s impact on alimony or discuss any family law question, please contact me at [email protected] or 301-563-6685 to schedule a consultation with me in Maryland. This blog is not intended to provide legal or tax advice, and I remind you to consult a CPA and/or lawyer before making any decisions relating to alimony.
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