The huge income tax revision adopted by Congress and signed in December by President Trump will impact every area of life in the United States – including divorce and alimony.
How will the new tax plan affect you if you are divorcing or divorced?
What if you are paying or receiving alimony or child support? Can a child support law firm in Orange County, CA help?
The new tax rules and their impact on divorce are explained below, and they will apply to every divorce in every state beginning in 2019.
Of course, every couple is different and every divorce is unique, so if you are personally considering or anticipating a divorce in southern California, you should seek individualized legal advice from an experienced Orange County divorce attorney – as soon as possible.
WHAT HAPPENS TO ALIMONY PAYMENTS UNDER THE NEW TAX RULES?
For the most part, the new tax rules will not go into effect until 2019, so those rules will not apply to divorce proceedings that are concluded this year.
One important provision of the new tax plan eliminates the deduction for alimony payments, so some observers are concerned that divorce negotiations will be more difficult in the future, and spouses will receive less spousal support, since the spouses who pay alimony will have to pay more in taxes.
According to Orange County divorce attorney Wail Sarieh, “Yes, the tax plan will have an affect more likely in January 2019, and one of the issues is that support won’t be taxable to the payee and NOT deductible to the payor.”
Precisely what is the new tax deduction rule regarding alimony?
For any divorce that is initiated on or after January 1, 2019, a spouse who pays alimony will not be allowed to deduct it, and a spouse receiving alimony will no longer have to pay taxes on it.
In other words, the new law is the exact opposite of the current law, which allows the spouse who pays alimony to deduct it and compels the spouse who receives alimony to consider it as taxable income and pay taxes on it.
WHO BENEFITS UNDER THE NEW TAX PLAN? WHAT IS THE MATH?
Here is an example:
Let’s say Pat currently pays alimony in the amount of $30,000 yearly.
Pat is taxed at the 33 percent rate, so taking the deduction saves Pat $9,900.
Pat’s lower-earning ex-spouse, Jess, pays taxes at the 15 percent rate, and the alimony Jess receives is considered income.
Jess pays $4,500 in taxes on the $30,000 alimony amount instead of the $9,900 that Pat would have paid without the deduction.
Thus, under the current tax rules, the ex-spouses have kept $5,400, and the deduction makes the alimony payments more affordable for Pat.
Those advantages will disappear under the new tax plan.
How many people will be affected by the tax changes?
That depends on which federal statistics you cite, because the IRS and the Census Bureau offer wildly inconsistent figures.
The Census Bureau tells us that 243,000 ex-spouses received alimony payments in 2016.
But the Internal Revenue Service reports that 361,000 taxpayers claimed to make alimony payments in 2015, while only 178,000 taxpayers claimed to receive alimony payments in 2015.
IS THERE A TAX DISTINCTION BETWEEN ALIMONY AND CHILD SUPPORT?
The Census Bureau also reports that more than 4.3 million parents received child support payments in 2016.
Proponents of the new tax rules argue that the alimony deduction functions as a “divorce subsidy” and that the tax code should treat alimony payments like child support payments, which are not deductible for the paying parent or taxable for the receiving parent.
Critics of the new tax plan are also concerned that eliminating the deduction will reduce the alimony dollar amount that ex-spouses receive.
One divorce attorney tells the New York Post that beginning in 2019, ex-spouses receiving alimony will probably lose ten to fifteen percent of what they would receive under the current tax rules.
And Nancy Hetrick, a certified divorce financial analyst who’s based in Phoenix, agrees.
She told CNBC, “Alimony payers won’t be able to afford to give as much because they’ll have to give it to Uncle Sam instead. There will be less money to go around to support the two households.”
WHAT IS CALIFORNIA’S TEN-YEAR RULE?
Alimony is most frequently awarded in divorce cases where there is a significant earnings discrepancy between the divorcing spouses and where the marriage has endured for at least a few years.
In California law, alimony is called “spousal support.” You may be familiar with the state’s “ten-year rule,” which awards “permanent” spousal support, in some cases, to ex-spouses who were married for a decade or more.
“Permanent” spousal support in California is seldom ever really permanent, however, but the word is used to distinguish the long-term spousal support sometimes awarded after longer marriages from the “temporary” alimony that is sometimes awarded after a marriage of less than ten years.
Spousal support – either “temporary” or “permanent” – can be reduced or terminated whenever changing circumstances genuinely warrant a change in the alimony arrangement.
It is important to remember that the new tax rules will not affect anyone who is currently paying or receiving alimony or anyone whose divorce is finalized in 2018.
But if you are anticipating or considering a divorce in California, you need to consider the potential impact of the new tax rules on your own situation, and it might be in your best long-term interests to initiate legal action sooner rather than later.
HOW CAN A DIVORCE ATTORNEY HELP?
You’ll need to consult with an attorney who can help you if the Internal Revenue Service has any questions about the alimony payments you make or receive or about any other divorce-connected tax matter.
Going into a divorce, whether your situation is comfortable or modest, you must be represented by a seasoned divorce lawyer who is familiar with the tax issues involved in the divorce process.
In southern California, an Orange County divorce attorney can advise you and help you keep your finances and taxes in order during the divorce process.
Do not be hesitant to ask your divorce attorney about any financial or tax matter related to your divorce.
Most family law attorneys deal with these matters routinely; most family law attorneys will be happy to answer your questions and address your concerns.
Understanding what’s at risk in a divorce can help you avoid trouble with the IRS. Taxes, of course, are not your only financial concern when you divorce, so you’ll need the advice and representation of a skilled, trustworthy divorce attorney in Orange County who will fight diligently and aggressively on behalf of your best long-term financial interests.