Losing Alimony Deduction Will Be Costly for Spousal Maintenance Payers

 Posted on February 02, 2018 in Alimony / Maintenance

Spouses have until the end of this year to complete a divorce settlement with a spousal maintenance arrangement that will still qualify for the alimony deduction on federal taxes. As part of the recent federal tax reform law, the IRS will no longer offer the deduction for spousal maintenance agreements that are created in 2019 and later. This legal decision has tax implications for both the person who is paying alimony and the person who is receiving it. As a result, it may become more difficult for parties to agree on levels of spousal maintenance. This is the first in a three-part series on how eliminating the alimony tax deduction will affect divorces and why you may want to complete your divorce before the change starts.

Cost vs. Savings

On a basic level, the elimination of the alimony tax deduction is meant to be revenue neutral for the federal government. The IRS will collect more tax revenue from spousal maintenance payers, but spousal support recipients will pay less tax because the payments will no longer be taxable income. When putting the new law into practice, it becomes clear that spousal support payers may lose more in taxes than recipients will save. Presenting a specific example can help explain why this is the case. Because men are a majority of spousal maintenance payers, the example will follow those gender roles.

By the Numbers

The paying party contributes $30,000 in spousal maintenance each year and has an annual income that puts him in the 33 percent tax bracket. The recipient has a lower income that puts her in the 15 percent tax bracket. By using the current tax law:

• The man saves $9,900 on his taxes by deducting the entire $30,000; and
• The woman pays $4,500 more in taxes due to having to report the payments as part of her income.

The man is saving more than twice as much as the woman is paying because of the different tax brackets. Only when both parties are in the same tax bracket would the new law truly be revenue neutral.

Conclusion

Spousal maintenance payers who are in a higher tax bracket than the recipients will see a greater increase in their tax payments than the recipient will see in savings. Losing the alimony deduction could also be costly for low-income spousal maintenance payers because they more acutely feel any loss of tax savings. A Kane County divorce attorney with Goostree Law Group can help you complete your divorce settlement this year in order to take advantage of the alimony tax deduction. To schedule a free consultation, call 630-584-4800.

Source:

https://www.usatoday.com/story/money/taxes/2017/12/24/exes-and-taxes-how-tax-overhaul-would-alter-alimony/976413001/