By Kate Haaksonsen, partner at Brown, Paindiris & Scott
Before the Tax Cuts and Jobs Act was signed into law in December 2017, it was the law for decades that alimony payments made during and after a divorce were tax deductible for the spouse paying them and taxable income to the “receiving spouse”. This tax provision benefited families because alimony was taxed at the lower tax rate of the receiving spouse instead of at the higher rate charged on the income of the paying spouse. In effect, it increased the size of the financial pie.
This tax treatment continues to be good law for alimony payments made under pre-2019 divorce judgments.
But for divorces taking place in 2019 and later, the new law eliminates the deduction for alimony payments, meaning that the tax savings from the alimony deduction (which may be substantial) are no longer available. In other words, alimony is paid from the paying spouse’s net income making it subject to a higher tax rate and resulting in less income to divide between households. So now the tax treatment of alimony and child support are essentially the same.
Unlike many provisions of the Tax Cuts and Jobs Act of 2017 which expire in 2025, this provision is permanent.
Although it is early to tell the full extent of the impact of this change, it will no doubt effect negotiations in divorce cases because a useful tool for helping divorcing spouses has been eliminated.
Each Attorney in our Family Law department has experience drafting alimony provisions and experience in achieving the best financial outcome for our clients. They can offer their insight and experience in working through the alimony considerations with you.