Couples negotiating a divorce in California relied on long-standing provisions in the U.S. tax code that allowed the spouse who paid spousal support to deduct these payments from their federal taxes. However, the new federal tax law eliminated this deduction and will likely complicate divorce settlements.
The new tax law removes the deduction for the spouse who pays spousal support. Likewise, alimony will no longer constitute income to the spouse who receives it. These changes will govern alimony agreements concluded at the beginning of 2019. Higher-income spouses lose incentives to pay higher alimony next year because of the loss of this deduction. Removing this incentive hurts both spouses.
According to a survey of members of the American Academy of Matrimonial Lawyers, two-thirds of respondents predicted that divorces will become more contentious after these changes take effect. It is anticipated that higher earning spouses will want to expedite divorce proceedings so that the settlement takes effect in 2018 and they can take advantage of the alimony deduction. Dependent spouses, on the other hand, will try to delay settlement until 2019 to avoid paying taxes on this support.
Spouses with bigger liquid assets are more likely to offer lump sums to their other spouses. However, payer spouses that have lower liquidity and their wealth captured in a house or retirement fund now have fewer options and may also try to speed up their divorce before the deduction ends next year.
Loss of this deduction also ends income shifting that frees up money for the entire family. Before these changes, spouses paid more alimony to lower their tax bracket which, in turn, provided more money to recipient spouses.
Under the new code provisions, however, recipient spouses will likely receive an alimony reduction that will be greater than the 15 to 20 percent they currently pay. The two to three percent reduction in tax rates in 2019 is unlikely to make up the financial losses to both spouses.
An attorney can help a spouse pursue the most reasonable options for alimony, child support and other divorce legal issues. Legal representation may be essential for assuring that rights are protected in court, mediation or settlement negotiations.
Source: NBC News, "New tax laws will likely make getting a divorce even worse," By Martha C. White, Feb. 23, 2018