The Tax Cuts and Jobs Act was designed to deliver tax relief to low and middle-income Americans. The reforms make some notable changes to individual and corporate income taxes. The Act’s changes are wide-sweeping and also affect child tax credit, divorcing couples’ filing status, and the capital gains implications of selling a marital home.
One of the most significant changes is to the tax law regarding alimony payments. Under the current tax law, alimony is taxable only for the recipient. The person paying alimony may deduct their alimony payment amounts from their income before calculating their adjusted gross income. However, for divorces finalized after 2018, that burden will shift from the recipient to the payer.
Alimony Payments Will No Longer Be Deductible for the Payer
Alimony payments are typically ordered when one spouse earns significantly more than the other, and are designed to help offset the costs of splitting the household finances. According to the Internal Revenue Service (IRS), about 600,000 filers deducted alimony payments in 2015. Currently, the recipient of alimony payments is required to pay taxes on those payments (which are labeled as income) and the payer can claim those payments as an above the line deduction.
The changes to alimony tax law go into effect in 2019 and will, therefore, apply only to alimony payments ordered after December 31, 2018. The tax burden will then be shifted to the payer, a change that may result in more taxes being paid because the higher-income spouse, who may be pushed into an even higher tax bracket, is usually the one paying alimony. The government estimates that increased economic growth generated by the plan will raise $908 billion in federal tax revenues over the next ten years.
The rationale behind the change, according to the House Ways and Means Committee is that it prevents divorced couples from reducing income tax through a form of payment unavailable to married couples. However, many disagree with this. Divorce experts argue that the change will result in lower alimony payments to the recipient because the deductibility of the payments is taken into account when determining how much the payer can afford to pay. Payers may be dissuaded from agreeing to lump-sum settlements without the incentive of a tax deduction.
The director of advanced planning for a private wealth management company notes that recipients of alimony will be affected in other ways as well. With lower taxable income, they may be able to more easily qualify for other deductions such as the newly-increased $2,000 child credit. However, it may also restrict recipients’ ability to make IRA contributions. Those who may be affected by the new tax laws may wish to seek the counsel of a knowledgeable attorney who can discuss their options as well as potential state tax implications.