If you are thinking about getting divorced it may be prudent to make a decision in the very near future. A recent change to the tax law will eliminate the deduction for alimony payments for all couples who divorce on or after January 1, 2019. This will not only be a huge financial blow for spouses who are ordered to pay spousal support, but it will also likely drag out divorce contests and increase the costs of litigation. Fortunately, couples who divorce or sign a separation agreement before the new year will be able to enjoy the benefits of the alimony deduction.
Current Law: Alimony Paid to a Former Spouse is Deductible
Most spouses have significantly different incomes. In some cases, one spouse may be the primary breadwinner, while the other is tasked with caring for the family and home. In other cases, one spouse may have a very high-income career, while the other is focused on schooling and holds down a part-time position. When these couples get divorced in California, the spouse with a greater earning capacity and/or higher income may be required to pay spousal support after the split. This spousal support, which is also known as alimony, is intended to help the spouse who earns less money to maintain their lifestyle and get on their feet.
Under the current tax law, a spouse who pays alimony is allowed to deduct that amount of money from their income. This allows the spouse to pass money onto his or her former partner without tax liability. Many times, when spouses learn about the tax benefits of alimony they become more agreeable to the idea of paying. The spouse who receives the alimony payments is then required to include the money as income.
Benefits of the Alimony Deduction
The benefits of the alimony deduction are best explained with an example. Let’s say that Joe and Sue decide to get divorced. Joe has income of $200,000 each year and Sue has income of $40,000 each year. Part of their divorce agreement includes a provision requiring Joe to pay Sue $30,000 in spousal support for a set number of years following their split. Under the current law, Joe would be entitled to deduct this $30,000 alimony payment on his taxes. As a result, his taxable income would be reduced to $170,000. This would not only reduce his tax liability, but also drop him into a lower tax bracket. Instead of being taxed on $200,000 of income at 33 percent, Joe would be taxed on $170,000 of income at 28 percent. This is a huge saving for Joe.
However, the alimony payment does not go untaxed. Sue would be required to add that $30,000 to her income for the year, meaning that she will be taxed on $70,000 of income. However, she will still fall into a much lower tax bracket than Joe. As a result, the family can enjoy more of that $30,000. Instead of being taxed at 33 percent, the money will be taxed at 25 percent.
Consequences of Eliminating the Alimony Deduction
Under the new tax law, alimony will be fully taxable. This means that both spouses will be required to pay taxes on the money that is used for spousal support. In the example above, Joe would still be required to pay his ex-wife $30,00 a year, but he would not be able to deduct it from his income. As a result, he cannot achieve a favorable tax situation. In fact, his effective tax rate will actually increase under the new tax law. This is definitely a lose-lose situation for Joe. He still has to pay but can’t reap a benefit. Sue will also still be required to declare the spousal support payments as income. Under the new law, she may actually end up paying a bit less.
When payors of spousal support are no longer entitled to a deduction on their taxes they may be less inclined to agree to alimony payments. Instead, spouses will likely contest requests for spousal support. This will hurt families as they get divorced. Alimony is a great way to help both spouses get on their feet after a divorce. When this is taken away, the spouse with a lesser income will likely be faced with greater burdens after a divorce. These contested requests will drag out divorce proceedings, rack up legal fees, and make the process even more complicated.
Call the Divorce Attorneys at Berenji & Associates
Are you thinking about getting a divorce in the near future? We understand that this is a difficult time in your life and that you may need to rely on spousal support after your split. Call the experienced Los Angeles spousal support attorneys at Berenji & Associates for help. We can help you get through this process quickly and efficiently before the end-of-the-year deadline. Contact our office today to schedule a free consultation and learn more.