Alimony Deductions
Future alimony negotiations become more challenging.
Previously, alimony was treated as taxable income to the recipient and therefore tax deductible to the payer. Beginning in 2019 under the new Act, alimony is no longer a tax-deductible item on the federal tax return. Therefore, the recipient will no longer be required to pay income tax and the payer will not be able to deduct the payment.
In a world where the payer and payee have the same effective tax rate, the impact of the new change to deductibility would effectively be neutral; however, in most cases the payer has a higher effective tax rate than the payee. Under the new law, some argue that this will likely reduce the support payments overall. Previously, if the tax rates were significantly different between the two parties, alimony payments were deducted at the higher income tax rate of the payer and taxes were paid by the recipient at his or her lower tax rate. This difference in tax treatment was beneficial to the recipient at the lower tax rate.
The new tax bill eliminates the deduction previously claimed by the payer, effectively increasing the cost of alimony payments. As a result, there is the potential for more challenging alimony negotiations and lower support payments moving forward. This tax treatment will only be applied to divorces settled after 2018 and will have no impact on existing (pre-2019) alimony agreements.
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