The new federal tax bill passed by a Republican Congress and signed into law by President Trump has many implications beyond lowering individual and corporate tax rates, and one of the most significant – if not the most significant – aspect of the new bill is in how spousal support (or alimony) payments are treated with regard to both the paying spouse and the receiving spouse.
For settlement agreements signed and divorces finalized on or after January 1, 2019, spousal support will no longer be deductible by the paying spouse nor will they be taxable to the receiving spouse. In most cases, this will result in higher taxes when looking at the combined financial pictures of both spouses. Furthemore, this change will significantly affect how divorces are negotiated and/or litigated.
Because the laws do not affect divorces finalized before January 1, 2019, persons considering divorce are encouraged to speak with an attorney soon to assess their options.
Why the New Law Can Mean Higher Taxes and Smaller Payments
Understanding how the new tax bill could mean higher taxes in the aggregate for divorcing couples takes demonstrating math by way of example.
Imagine a divorcing husband who will be paying $2000 a month in spousal support to the wife, and the husband’s top marginal tax rate is 35%, while the wife’s top marginal tax rate is 22% (in most cases, a higher-earning spouse is going to be paying alimony to the lower-earning spouse for obvious reasons).
Under the old tax laws for spousal support (which are again in effect for all current divorces and those finalized before the end of 2018), the husband could deduct all of the $2000 a month payment off the top of his income, meaning it won’t be taxed at the 35% rate. With a total of $24,000 spousal support payments he can deduct, this means a tax savings for him of $8400. The wife on the other hand would have been paying a 22% tax rate on the $24,000 received for a total of $5,280.
Although the tax burden was on the wife in this example, they had a combined tax savings of $3,120 (the difference between $8400 saved by the husband and $5,280 paid by the wife). Under the new rules in effect for 2019, the wife will pay nothing, but the husband will have to pay the additional $8400 in taxes.
Looking Forward Through 2018
Thus, under the old rules, family law attorneys were able to work with both parties to achieve mutually beneficial situations on spousal support, with the lesser-earning spouse being able to receive more money from the higher-earning spouse due to the immense tax savings the payments provided via the deduction. Going forward into 2019, this means spousal support payments will likely be lower but with more financial burden on both the paying and receiving spouses due to taxation issues.
The new rule will also affect spousal support agreements in place which are modified on or after January 1, 2019, but, importantly, the new rules will not affect those agreements finalized (and not later modified) before the end of 2018. Talk to an experienced family law attorney to discuss further what these changes may mean for you and you
Get Answers to Your California Family Law Questions
At Kearney | Baker in Pasadena, we represent spouses through all aspects of the dissolution/termination process. Our partners, Brian A. Baker and Gary W. Kearney, are both Family Law Specialists, as certified by the California State Bar. To schedule a consultation regarding any questions about family law in California, contact one of the family law attorneys at Kearney | Baker today at 626-768-2945.