A Major Tax Change on Alimony Payments
As of January 1, 2019, the tax on alimony payments changed dramatically. Prior to January 1, 2019, if you and your spouse had a court order or written agreement to pay alimony, post separation support, or other payments in the nature of spousal support, the person receiving the money from the paying spouse would have to pay taxes on that money. For pre-existing orders and agreements this tax arrangement will continue. However, as of January 1, 2019, any new agreements or court orders will require the payor spouse to pay the taxes on the money.
What difference does it make? A huge one. For example, in a family where the Payor spouse earns $180,000 and pays alimony of $3,000 per month, the tax difference is an increase of over 10% of the payor’s entire income. Under the pre 2019 law, the paying spouse would deduct the $36,000 paid to the other spouse from the $180,000, reducing his taxable income from $180,000 to $144,000 and his taxes from $57,600 (32%) to $34,560 (24%). The spouse receiving the income, assuming no other income, would pay taxes of 12% on the $36,000 or $4,320. That would make total taxes paid by both parties $38,880. Under the new law, Payor has to pay taxes on the full amount at the higher rate ($57,600) and the spouse receiving the income pays nothing. That difference to the government is a net increase of $18,720.
But the change falls disproportionately on the parties. The dollar difference for the spouse receiving the support is an increase in net income of $360 per month. However, doing a set off of $360 will not solve the problem created by the change in tax liability. The dollar difference for the paying spouse for the same money is a decrease in net income of $1,920 per month.
What can you do? If you and your spouse are currently trying to resolve the issues surrounding your separation, be sure to factor the tax consequences into your negotiations. Your attorney should be aware of the change in the tax law. There are still some tax benefits available in the form of deferred tax accounts such as 529 college savings accounts, which may help, but those benefits would not put present dollars into the receiving spouse’s hand. It is possible that there could be future changes in the tax law to help with this seeming inequality, but at present, the new tax law is now in effect.