- The Tax Cuts and Jobs Act introduced new tax rules for spousal support, also known as alimony.
- In the case of divorces that were completed after January 1, 2019, the alimony payer can no longer deduct the amount from tax.
- Spousal support payments are no longer considered taxable income for recipients.
- The result is an increased tax burden for the alimony-paying spouse and ultimately more money for the government.
January is unofficially known as “divorce month” and 2019 brings new tax rules for couples separating this year.
The GOP tax law was passed in December 2017, but it has taken some time for certain laws to become law. One of these laws changes the way spousal support or alimony is taxed and deducted.
Spousal support is an allowance paid by the higher earning spouse to the lower earning spouse during a legal separation and/or divorce. The amount and duration of the payments depend on various factors, including the length of the marriage, the ages of the spouses, and the degrees earned.
“Under current law, the payer can deduct the alimony and the recipient is taxed as income on it,” Alvina Lo, chief wealth strategist at Wilmington Trust, told Business Insider. “Thus typically the wealthier spouse (who pays alimony) receives a tax benefit from the deduction, and the less wealthy spouse (who pays alimony) pays income tax in a lower tax bracket.”
Continue reading: Here’s how the new US tax brackets for 2019 affect every American taxpayer
Under the new law, which affects divorces settled on Jan. 1, 2019 and beyond, the wealthier spouse — who Lo says is usually the husband — is responsible for paying taxes on the payments.
There’s an increased tax burden for the alimony-paying spouse – and more money for the government
Lo offered the following example: A husband and housewife earn a combined income of $500,000. In a divorce, the husband has to pay his ex-wife $150,000 in alimony.
According to old law The husband would receive a deduction of $150,000 (husband’s tax rate is 35%) and the wife pays $150,000 in income tax at a rate of 24%.
According to the new law the husband pays $150,000 in income tax (his tax rate is 35%). There is no deduction and the wife pays no income tax on $150,000.
The result is an increased tax burden for the husband and a lower tax burden for the wife, Lo said. “The government gets more because the $150,000 tax is borne by the husband at a higher rate,” she added.
These new tax rules do not apply to divorces completed on or before December 31.
The new SALT deduction limit may affect divorced couples
The new tax treatment of spousal support isn’t the only part of the tax reform impacting divorcing couples, Lo said.
“[T]Reducing the SALT deduction makes it harder for the ex-spouse to stay in the marriage home,” she said. which disproportionately affects those in high-income-tax states like California and New York.
“Before the tax law change, someone could remain in a sizable marital home with a modest spousal support payment and perhaps a lump sum payment that generates capital gains if she (and in such cases it is usually the wife) can also deduct a sizable amount in respect of the SALT deduction,” Lo said. “With the $10,000 cap on the SALT deduction, the overall tax burden is higher and it becomes harder to stay in the marital household.”
Tanza is a CFP® professional and former correspondent for Personal Finance Insider. She broke down personal finance news, writing about taxes, investing, retirement, wealth building, and debt management. She ran a biweekly newsletter and column that answered reader questions about money. Tanza is the author of two e-books, A Guide to Financial Planners and The One-Month Plan to Master your Money. In 2020, Tanza served as the editorial lead for Master Your Money, a year-long original series providing financial tools, advice and inspiration to millennials. Tanza joined Business Insider in June 2015 and is a graduate of Elon University, where she studied journalism and Italian. She lives in Los Angeles. Read more Read less
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