Under the new federal tax law, signed December 24, 2018, alimony payments will have different tax consequences. Prior to the new tax overhaul, alimony payments were tax deductible for the payor spouse and taxable to the recipient. Now the spouse making alimony payments cannot deduct them, and the spouse receiving payments will no longer pay taxes on them. Any final divorce orders signed before 2019 will not be affected.
The tax allocation preserved money for both spouses making payments more affordable. The payor spouse typically earns significantly more than the recipient spouse, and earns a savings around the rate of their tax rate. The tax payment falls on the recipient spouse, but at a much lower rate. Thus, the couple’s taxes are lower.
Why did Congress make the change?
One theory is that the IRS is frustrated by the discrepancy between those claiming they pay alimony and those claiming they receive alimony. In 2015, 361,000 people claimed they paid alimony while 178,000 people spousal support as income.
Additionally, Congress’ Joint Committee on Taxation estimates the law will generate a new $6.9 billion of new tax revenue over 10 years. The House Ways and Means Committee noted that divorced couples achieve better tax results than married couples, and termed the deduction a “divorce subsidy.”
Without the tax deduction for alimony payments, paying spouses will most likely way less to their exes. In effect, the paying spouse pays around 72 cents for every dollar of alimony. If the subsidy disappears, the contributing spouse will negotiate smaller payments, and create a higher need. Commentators speculate changes to South Carolina child support calculations, but none have been proposed at this time.
Overall, a Divorce decree in 2018 is going to leave both spouses with more money than a decree in 2019. Couples will have an incentive to finalize divorce agreements before the end of the year to take advantage of the current tax treatment. Divorce is hard on both spouses financially, and now the situation will become a little more difficult for all.
Jennifer Peltz, Exes and taxes: How the tax overhaul would alter alimony, The Associate Press (December 24, 2017, 4:00 PM), https://www.usatoday.com/story/money/taxes/2017/12/24/exes-and-taxes-how-tax-overhaul-would-alter-alimony/976413001/.
Phillip Bantz, A race to divorce?, 17 S.C. Lawyer’s Weekly 1, 1-6 (2018)