Alimony payments won’t be deductible for parties signing divorce and separation agreements after 2018. This will have a big impact on those who pay or receive alimony. Those who pay lose the deduction and those who receive no longer have to declare the payments as income. Be aware that deductions will still be allowed for agreements signed in 2018 and before.
The changes can cause a negative impact on both parties. Right now a household received tax relief through the divorce process as the higher paid earner (who has a larger tax burden) is essentially transferring income to the lower paid spouse (whose tax burden is less).
Hypothetically, Party A agrees to make alimony payments of $100,000 year for 10 years to Party B. Under the current tax code Party A would save approximately $37,000 per year based on the current deduction. Party B in the lower tax bracket might owe approximately $15,000 of tax on the $100,000 in alimony payments received.
Alimony is a means to equalize the income of the two parties to help defray splitting one household into two. The deduction is beneficial for the paying spouse whose liquid assets are saved in order to reduce the overall cost. Spouses may now choose to negotiate lesser payments because there is no longer any tax savings benefit to them.
The alimony write-off has been in the tax code since 1942. Who benefits from this change? Purportedly, the Internal Revenue Service will no longer have to police a tax gap between amounts paid and amounts reported by alimony recipients. I suspect that argument is quite specious, giving the “deminimis” magnitude of those affected.
We encourage you to contact our office so you may have a clear understanding of the new tax code.