How Federal Tax Reform Affects Spousal Support

 Posted on March 12,2018 in Family Law

In December 2017, Congress passed the Tax Cuts and Jobs Act, which made the most significant changes to the federal tax code in the last three decades. Since the tax reform law was passed, the news has been filled with discussion of its impact on people in the United States.

While many reports have focused factors such as corporate tax rates, one less-discussed update to the law will have a major impact on divorcing couples, changing the way taxes apply to spousal maintenance (also known as alimony or spousal support).

How is Spousal Maintenance Taxed?

Currently, the alimony and child support payments that spouses pay or receive following divorce are taxed differently. While the payor of child support cannot deduct these payments from his or her taxes, and payments are not considered taxable income for the payee, the opposite is true for spousal support, which is tax-deductible for the payor and taxable for the payee.

Under the new tax law, alimony and child support will be treated the same; the payor will not be able to deduct payments from his or her taxable income, and the payee will not pay taxes on the payments he or she receives. This change will apply to couples who finalize their divorce after December 31, 2018.

The Impact of Tax Reform on Divorcing Spouses

With this change to the law, the government has effectively removed a benefit that was available to divorcing spouses. The deduction of alimony payments from a payor’s taxable income often reduces his or her income to a lower tax bracket, freeing up more income to be shared between both spouses. Following this change, spousal maintenance payments are likely to be smaller than they would have been previously.

Spouses who are divorcing in 2018 may wish to complete their divorce before December 31, allowing them to take advantage of the previous tax law. In any case, divorcing spouses should review their divorce settlement to ensure they fully understand their tax liabilities, including the tax consequences of the division of marital property. Married couples who have a prenuptial agreement that specifies whether one spouse will pay alimony in the case of divorce may need to update their agreement to ensure that it correctly reflects the new tax law.

Contact a Milwaukee, WI, Alimony Lawyer

If you are considering divorce or have already begun the divorce process, it is important to consider how taxes will affect the spousal support or child support you will pay or receive. The attorneys of Gimbel, Reilly, Guerin & Brown, LLP can help you understand your options, work with you to address the issues that must be resolved, and advocate for your financial interests. Contact our Milwaukee divorce attorneys at 414-271-1440.

Sources:

http://money.cnn.com/2017/12/15/pf/taxes/alimony-tax-bill/index.html

https://www.pbs.org/newshour/politics/how-the-tax-overhaul-will-affect-alimony-deductions