Berry Moorman

Spousal support tax deduction change

Spousal support tax deduction change

by John J. Schrot, Jr., Esq.

The 2017 Tax Cuts and Jobs Act (the “Act”) was signed into law in December, 2017, and it changes the treatment of spousal support (alimony).  Currently spousal support is tax deductible for the paying spouse and taxable as income to the receiving spouse, unless the parties otherwise provide in a judgment of divorce or separate maintenance.  The spousal support deduction was enacted in 1948 with the idea that if a former family’s income is divided between the parties that tax treatment should correspond.  This spousal support deduction will be repealed.  Spousal support will not be deductible by the payer or taxable to the recipient for (1) any divorce or separation documents executed and/or entered by the court after December 31, 2018 and (2) those orders already in place and modified after December 31, 2018 if the modification expressly provides that “amendments made by this section apply to such modification.”  Both parties have to agree that the Act applies to modifications.

Shifting the tax burden to the payer will generate more money being paid in taxes overall.  Congress had to raise taxes on divorced couples in order to cut taxes for certain interest groups.  Under the Act, spousal support will be paid with after tax dollars, and the recipient will not have to pay taxes on it.  This will be similar to child support, and the tax laws relating to child support are remaining the same:  payments are nondeductible to the payer and not taxable to the recipient.

Parties to divorce and separation litigation will no longer be able to arbitrage the variation in tax rates with spousal support.  Many financial and legal experts project that because the payers are typically in a higher tax bracket than spousal support recipients and will no longer get a valuable tax break that spousal support payments in the future will be significantly lower.  Accordingly, attorneys, divorce planners, and financial advisors must take this significant tax change into consideration in their negotiations.

For more information regarding spousal support (alimony) or other related issues, contact a member of Berry Moorman’s family law practice group.