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Balancing family dynamics in a divorce is never easy. New laws have added an extra layer of complexity. Prior to 2019, alimony deduction was a key divorce planning strategy for over 70 years. The alimony payer, also known as alimony or spousal support, has deducted his payments and the receiving spouse has paid taxes on them. This allowed divorcing couples to shift taxable income from the supporting spouse in a high tax bracket to the lower-earning spouse in a lower tax bracket. The result was a valuable opportunity to save their entire tax bill, leaving more money for the two households combined.
Divorces finalized before 2019 retain this status for future payments. But for new divorces finalized after 2018, alimony payments are no longer deductible by the payer and no longer taxable at the federal level by the recipient. State taxes will vary, with some like California and New York allowing deductibility/taxability while others like Illinois, Pennsylvania and Tennessee are aligning with the new state non-deductibility. This non-deductibility makes spousal support tax-neutral, just as child support has always been.
At first glance, one might think that this is good news for the recipient. Unfortunately, the practical effect of the new law is that, in most cases, the payer owes more tax but pays less alimony, and the recipient owes no tax on the payment but receives much less money. Both spouses have less after-tax cash to spend.
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