New Law Changes Alimony Taxation
Passage of the new tax bill (also known as the Tax Cuts and Jobs Act of 2017) changes taxation of alimony, also known as spousal support. Prior law treated spousal support as a tax deduction for the payer and income to the payee. The new law eliminates the payer’s tax deduction and the payee’s requirement to treat spousal support as taxable income.
This change, effective for agreements entered into after December 31, 2018, will have a significant impact on settlement negotiations. Divorcing parties receiving alimony will be incentivized to postpone finalizing their divorce to take advantage of these new rules. Alimony payers will be incentivized to finalize their divorce before the new law takes effect.
Below is a practical example of how the change will impact the taxable income of former spouses. Assume for purposes of this example that the monthly alimony obligation is $2,000 ($24,000 per year), that payer’s annual income is $100,000, and payee’s annual income before alimony is $50,000.
The taxable income for the parties in 2018 is $76,000 (payer) and $74,000 (payee). In 2019, the taxable income will be $100,000 (payer) and $50,000 (payee).