In the divorce process, one party may become legally obligated to make alimony payments to the other. Since these payments are typically costly, obtaining tax deductions for the payer has often been a critical step in formulating a divorce settlement.
By contrast, the recipient’s payment is generally taxed like regular income. The current setup tends to preserve more money overall to allocate between spouses, helping both parties afford living separately.
However, the new tax overhaul eliminates the tax deduction of spousal maintenance payments. The alimony deduction repeal will affect divorces after December 31, 2018. This means that in 2019, the spouse paying spousal support cannot deduct it, and the spouse receiving the money no longer has to pay taxes on it.
Legal experts worry this provision will make divorce settlement negotiations tougher and result in less alimony since the money will go to taxes instead. Consequently, the alimony tax deduction may also complicate how child support is calculated and how assets are divided. All of this could make divorce settlements much more difficult to reach, leading to litigation—and more money spent.
Additionally, couples working out prenuptial—and postnuptial—agreements should be aware of how the provision will affect clauses that outline what alimony would look like should the couple get divorced. Until now, those clauses have often been drafted under the assumption that the alimony tax deduction will be in place.
According to the data provided by the Internal Revenue Service (IRS), an estimated 598,888 taxpayers claimed the alimony deduction on their Form 1040, for a total of over $12.3 billion, in 2015. Congress’s nonpartisan Joint Committee on Taxation estimates repealing the deduction will add $6.9 billion in new tax revenue over 10 years, which is equal to less than half a percent of the $1.5 trillion tax cut plan.