Longstanding Alimony Tax Deduction Ends December 31

 Posted on December 31, 2018 in Divorce

2019 will bring a significant change to post-divorce life for many Americans, due to the 2017 federal tax reform legislation that will reverse a provision that dates back seven decades. For divorces which are completed on January 1, 2019 and afterwards, individuals who pay spousal maintenance (alimony) to a former spouse will no longer be able to deduct that amount from their taxes, a deduction which has been allowed since the 1940s. Also, individuals who receive spousal maintenance will no longer be required to declare those payments as taxable income.

This modification is expected to add a substantial amount to the U.S. Treasury’s bottom line each year. In 2010, approximately 600,000 Americans claimed the alimony tax deduction, which added up to more than $10 billion.

As a result of this change, which will greatly impact high-net-worth individuals and couples, divorce lawyers across the country say they have seen a noticeable uptick in divorces leading up to the December 31 deadline. The reason for this is simple: there will be less money for families once the new law goes into effect.

Paying Alimony and Receiving Alimony

Currently, if a former spouse makes, for example, $300,000 a year, pays $100,000 in annual spousal maintenance, and is liable for 35 percent in federal taxes on income more than $200,000, being able to deduct the $100,000 of maintenance from their taxable income reduces their tax liability by $35,000. The alimony recipient currently does pay taxes on the full maintenance amount received, but at a significantly lower tax rate, resulting in a total of about $17,000 in taxes paid to the Treasury.

However, under the new law, the IRS would now receive the above-stated $35,000 in taxes from the payor and receive nothing from the payee. This equals a net increase of $18,000 received by the Treasury, and it means there will be $18,000 less to be divided between the spouses.

Because the new law will likely cost both parties money, many spouses currently involved in divorce cases are pushing to have the spousal maintenance issue of their divorce negotiated and signed off on before the end of 2018. Many attorneys believe that an agreement regarding alimony will suffice to allow the alimony to still be governed by the existing (old) tax rules, without the need to settle every issue and completely finalize the entire divorce before December 31, 2018.

Contact an Oak Park Divorce Lawyer

Spousal maintenance is often a critical part of a divorce case, regardless of whether you are the person paying or receiving. The Law Office of Vincent C. Machroli, P.C. can help ensure that the amount of alimony in your case is fair and in accordance with Illinois law, while also working to ensure that tax issues are addressed. To speak with an experienced Hillside, IL divorce attorney, call 708-449-7400 today for a free consultation.

Sources:

https://www.usatoday.com/story/money/personalfinance/2018/12/06/alimony-deduction-divorce-2019/2225887002/

https://www.inc.com/bill-murphy-jr/after-president-trump-signed-last-minute-tax-law-some-couples-are-rushing-to-get-divorced-by-december-31-why-didnt-anyone-predict-this.html