Changes coming as a result of the 2018 Tax Cuts and Jobs Act could leave some alimony recipients – and payers – out in the proverbial cold in 2019. Next year will bring the end of a very popular tax credit that allows alimony payers to deduct payments from their overall taxable income. This means that, for the wealthiest Americans, their entire yearly income will be taxed at the 37 percent tax rate, not just the amount left over after paying alimony.
The upcoming changes have led some divorce attorneys to actually advise clients strongly considering divorce to get the process moving so that it can be finalized by the end of the year; any divorces settled or modified in 2018 are not subject to the new alimony rules.
Why the change?
In a word: money. The government estimates that this change to alimony’s deductibility will add approximately $7 billion to the government’s coffers in the next decade.
Critics of the law have stated the obvious: since women disproportionately receive alimony, they will likely be more impacted by this law than men will. Essentially, the law removes any incentive to pay higher alimony. Currently, paying spouses are more willing to pay higher amounts because of the huge tax benefits; alimony can, depending on the amount, put someone into a lower tax bracket or at the very least represent a massive deduction in overall tax burden.
It may still be possible in 2019 to balance any tax deductions losses with the use of other taxable vehicles like retirement accounts, QDROs, real estate and more. Careful tax planning in conjunction with the divorce will be a necessity, though, even more so than it is currently.