How Is Spousal Maintenance Affected By the Tax Reform Bill?

 Posted on January 24, 2018 in Spousal Maintenance/Alimony

Sweeping tax reform legislation was passed by the United States Congress in December 2017, with the Tax Cuts and Jobs Act representing the largest change to the federal tax code in the past three decades. The changes implemented in this bill will have an impact on people across the country in a wide variety of ways, and both individuals and organizations are still working to determine how they will be affected. One area of this bill that divorcing spouses should be aware of is a major change to how spousal support (alimony) will be taxed.

Taxes on Spousal Maintenance

When spouses divorce, one spouse may be required to pay maintenance to the other spouse, allowing them to maintain a lifestyle similar to what they enjoyed when they were married. This is usually the case when one spouse earns a higher income or when a spouse has chosen to devote their time and energy to the family rather than to further their career. Prior to the tax reform bill, the spouse paying maintenance would deduct the amount of these payments from their taxable income, and the spouse receiving maintenance would pay taxes on these payments.

The Tax Cuts and Jobs Act now treats maintenance the same way as child support is treated. That is, it will no longer be tax-deductible for the paying spouse or taxable for the receiving spouse. This change will go into effect for divorces which are finalized after December 31, 2018.

How This Change Will Affect Divorcing Couples

Under the previous law, divorcing couples were often able to work together to determine how to allocate child support and maintenance in a way that resulted in the lowest possible tax burden for both spouses. Tax-deductible maintenance may have allowed the paying spouse to be in a lower tax bracket, providing more income to be shared between the spouses. Since the tax reform bill has eliminated this deduction, a paying spouse’s net income may be lower, resulting in smaller maintenance payments.

Spouses who are considering divorce or who have begun the divorce process may wish to finalize their divorce before the end of 2018, so that they may take advantage of the benefits of tax-deductible maintenance while it is still available. Also, spouses who have a prenuptial agreement regarding maintenance that one spouse will pay in the case of divorce may need to update their agreement to ensure it follows the new tax law.

Contact a Skokie Divorce Lawyer

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