While most of the media focus on the new tax code changes has been elsewhere, if you are recently divorced or divorcing you may be interested to hear about the changes impacting spousal support.
Specifically, beginning this year income tax on spousal support dollars will be paid by the payor, or the person ordered to pay support to a former spouse.
In the past, spousal support – sometimes known more colloquially by the outdated term “alimony” – was considered taxable income to the recipient and tax deductible to the payor. In that way, income tax on the money was historically paid by the person in the lower income tax bracket. In contrast, income tax on money that goes toward child support has been the responsibility of the payor and was collected tax-free by the recipient.
Divorce lawyers have long taken advantage of the tax schema to help resolve their cases, since it gave the higher income earner some incentive to agree to a higher amount of spousal support than they might otherwise and leaves the recipient with a bit more after-tax cash for expenses.
It is true that spousal support awards – which were originally intended to provide for women who were predominately homemakers or who had lower-earning positions than their spouses – have decreased as societal norms change. Even so, IRS statistics indicate some 12 million tax returns claim deductions for spousal support payments each year and it remains an important component of many divorce negotiations.
In theory, removing the deduction should generate higher revenues for the government because the money would be taxed at the payor’s higher tax rate. In addition, this change ought to address the disparity in reporting; the number of recipients claiming spousal support income totals something closer to 10 million, creating an administrative nightmare for the IRS to reconcile underreporting and recover the missing revenue.
However, experts generally believe that spousal support awards, whether through settlement or ordered by a court, are going to get a lot less generous this calendar year.
Indeed, the last several months of 2018 saw parties rushing to finish up their matters in order to capitalize on the old laws. The Ohio spousal support statute specifically requires a court consider the tax implications when determining an appropriate award. Under the new tax code, a higher amount of any award will get allocated to taxes and the money simply won’t go as far. And payors are certainly reaching the conclusion that higher support amounts are less doable and palatable without the tax benefit.
So who will be affected by this change? Certainly anyone who obtains a divorce, including those who are in the process of divorcing, will be subject to the new laws. Deductible spousal support awards issued before 2019, on the other hand, will remain deductible. If an award is modified after the new law took effect, the language of any agreement will govern. That is, if the parties agreed that spousal support was to be deductible by the payor and taxable income to the recipient, that schema should stand.
Time will tell which spousal support levels become a bit more “normal.” But courts and practitioners are anticipating big changes.
This article originally appeared as a column for the Cleveland Jewish News.