Planning to get a divorce? If so, you might want to hurry up to avoid the impact of a major federal tax change if you are the payor. As the payee, you may be better off waiting until 2019.
Beginning January 1, 2019, spousal maintenance payments will not be tax-deductible anymore to the payor of maintenance. Conversely, the person receiving spousal maintenance payments will no longer be taxed on this money. The change falls under the Tax Cuts and Jobs Act, which was signed into law by President Donald Trump on December 22, 2017.
Use of the terms vary by state, but spousal maintenance (the term used in New York state), also called “spousal support” or “alimony,” describe payments made by one spouse to another after divorce. “Alimony” is the oldest of the terms, but has largely been phased out in favor of “maintenance.”
Currently, maintenance payments may be deducted from the total taxable income of the payor, while the recipient must pay income tax on the proceeds. The change will put spousal maintenance in line with child support payments, which are nondeductible and non-taxable for the payor and recipient, respectively. It might also make divorcing more contentious.
Ninety-five percent of members recently surveyed by the American Academy of Matrimonial Lawyers (AAML) anticipate the tax plan will change how divorces are settled, while another 64 percent believe that the cases will become more acrimonious. Fifty-nine percent said that their matrimonial clients are “concerned” about the repeal of the maintenance deduction.
Under the new law, the higher-earning spouse may be less willing to agree to a bigger payment because his or her taxable income will not be reduced, potentially leading to less spousal maintenance.
Indeed, maintenance guideline amounts may need to be discounted to take into consideration the tax implication. However, 62 percent of survey respondents said the changes in the tax plan offer a greater benefit to the payee in terms of spousal maintenance, because they are not paying income tax on the maintenance payments. Depending on your financial situation, an attorney will be able to explain these tax implications to you.
Although more men than women pay maintenance to former spouses, the percentage of men receiving spousal maintenance is increasing. “Women have become the leading earners in many families—meaning more men are eligible to receive spousal support following a divorce,” according divorcemag.com. However, citing a Forbes article, “the fact that women are the leading earners in 40 percent of households leads some to believe that there are plenty more men who are eligible for spousal support, but don’t get it,” divorcemag.com reported.
A recent AAML survey indicated that 45 percent of AAML members reported an increase in maintenance paid by women, while 54 percent cited an increase in the number of mothers paying child support the past three years.
The change in maintenance deduction will not affect existing maintenance agreements, but other changes could affect pre-nuptial agreements or divorce settlements. Anyone planning to divorce or modify an existing marital agreement should consult a family or matrimonial law attorney to better understand the impact of the new tax law before it goes into effect.