Replacement Tax Law
Congress passed sweeping tax reform legislation and it was signed into law by President Trump on December 22, 2017. Amongst the multitude of changes in the bill, there are some in particular that will impact divorce. These changes are substantial, and it is important to be informed on them as they will most certainly influence how divorces are negotiated and ruled on.
Spousal Support Taxation
Perhaps the most significant change is how spousal support payments are taxed. Under the previous law, the spouse paying spousal support could deduct the amount paid. Conversely, the recipient of the support had to pay taxes on the monies received as spousal support or alimony. Under the subsequent law, this has been reversed. Beginning in 2019, the spousal support payments were no longer deductible for the paying spouse, and the recipients do not have to pay taxes on their monthly payments. For example, under the previous law, someone paying $30,000 in spousal support ($2,500 per month) could deduct $9,900, and the spouse receiving support had to include the $30,000 in their gross income for tax purposes. Because the spouse receiving the money is taxed at a lower rate, the parties could save over $5,000. Under the new law, the recipient receiving $2500 a month will now get that money tax free, while the paying spouse is taxed on it at their higher rate.
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Why The Change?
The reason for the change is to make up for a lack of taxable income that results from the previous arrangement. As you might imagine, those paying the support are more likely to report it on their taxes in order to receive the deduction, whereas those receiving the support were less likely to report the addition to their gross income. The Joint Committee on Taxation projects that the change will yield $6.9 billion in tax revenue. Some commentators are concerned that this will result in lower spousal support awards all around. If the party paying support no longer gets a deduction, they have less available income to pay their ex-spouse, a factor that courts are likely to take into consideration when calculating support awards.
Another change that will impact divorce settlements involves child tax exemptions. Prior to the new law, taxpayers were able to claim an exemption worth $4,050 for each child. The current legislation no longer allows this exemption. Instead, the child tax credit was increased from $1,000 to $2,000. These changes happened alongside others (such as increased standard deductions for single filers and Head of Household filers) which will all have to be considered when navigating your own terms. An experienced attorney will be able to help with these decisions.
These changes did not affect anyone who divorced or signed a separation agreement before 2019.