Alimony Payments Directly Impacted by New Tax Act
The Tax Cuts and Jobs Act (“the Act”) has changed the treatment of alimony payments which will impact a significant number of Americans. Under the new law, alimony payments are now nondeductible by the payer and not included as income to the receiving spouse. This change is effective for divorces or legal separations executed after December 31, 2018, and does not apply to existing divorce or separation agreements. Any pre-2019 agreement that is legally modified after December 31, 2018 will not follow the Act unless the modified agreement expressly states that the Act treatment of alimony now applies. Alimony payments will now fall in line with the way child support payments are treated.
Currently, the payer of alimony may deduct the alimony payments made during the year as an “above the line” deduction on their individual tax return while the receiving spouse includes the alimony payments as income on their individual tax return and pays tax thereon. The current reporting typically preserves more money overall between the spouses.
For illustration purposes, under the current law which will now change, Spouse A pays $100,000 a year in alimony and is taxed federally at 35% which results in a savings of $35,000. Spouse B includes the $100,000 of alimony in gross income and is taxed at 25%, paying $25,000. Between the spouses, $10,000 has been saved.
The deductibility of alimony payments has historically been a motivation in settling divorce cases by adding more money to the pot for both parties and making living separately more affordable. This change to alimony payments will call for a new approach to determining the availability of funds to pay alimony and may complicate how child support is in-turn calculated and how assets are divvied up.
Be sure to enlist an expert to appropriately guide you in these matters. Please feel free to reach out to Sax’s Valuation, Forensic and Litigation team to help you navigate the effect of this change.
Megan Sartor, CPA, ABV, CFF is a Senior Manager with Sax and specializes in the areas of business valuation, forensic accounting and litigation support. Her work in litigation support includes matrimonial matters, fraud cases, shareholder disputes and forensic accounting, among others. Megan can be reached at [email protected]