Elimination of Alimony Deduction Gives Urgency to Divorces

 Posted on May 29, 2018 in Spousal Maintenance

Negotiating spousal maintenance agreements during divorce may become more contentious because of a change to a long-standing tax law. The federal tax reform bill passed in late 2017 eliminated the popular alimony deduction for federal income taxes. The deduction is an incentive for higher-income spouses to agree to pay spousal maintenance. With the uncertainty that the change has created, many divorcing couples are rushing to complete their agreements before the law goes into effect.

How It Works

The current tax law allows spousal maintenance payers to deduct the value of their annual payments from their total taxable income. The maintenance recipient must report the money as taxable income. The change to the law will make maintenance tax-neutral. The payer can no longer claim a deduction, and the recipient will no longer pay taxes on the payments. There are three caveats to the law that benefit those who want to continue using the alimony deduction:

• The law does not go into effect until January 2019;
• Payers who created a spousal maintenance agreement before the law begins can continue to use the deduction; and
• Modifications made to a maintenance agreement after 2018 will not eliminate the alimony deduction unless the modifications state so.

Problems

The change initially seems like a financial boon to spousal maintenance recipients, who will no longer include the payments as taxable income. However, they risk receiving less value from the agreement than they would have with the previous tax laws. Because spousal maintenance is not guaranteed, the spouses must negotiate whether to include maintenance in the divorce agreement and what its value should be. The alimony deduction recuperates money from the maintenance payments so that the net cost to the payer is less than what he or she is paying. Maintenance payers are often in a higher tax bracket that recipients, meaning that the payer is saving more money than the recipient is paying in taxes.

Without the alimony deduction, the payer will want lower maintenance payments. In some cases, the value of the maintenance payments being offered may be less than what the recipient would have kept after taxes if the payer was allowed to use the tax deduction. If a court must decide on maintenance payments, the judge will account for the absence of a tax deduction when calculating a total.

Acting Now

Tax and divorce professionals will not know all of the effects of the new law until it becomes active. To avoid this uncertainty, many divorcing couples are trying to finish their agreements before the end of the year. A DuPage County divorce attorney at Calabrese Associates, P.C., can advise you on ways to complete your divorce in an efficient manner. Schedule a consultation by calling 630-393-3111.

Source:

https://www.cnbc.com/2018/02/16/loss-of-alimony-tax-break-in-tax-law-may-inflame-divorce-negotiations.html