Contemplating Divorce? If Alimony is an Issue, You Better Hurry
The Tax Cuts and Jobs Act ends alimony deduction in Georgia
on April 20, 2018
Updated on May 3, 2022
Now that the Tax Cuts and Jobs Act (TCJA) has been signed into law, taxpayers can evaluate its impact. In particular, one group of folks that’s in for a big change is spouses considering divorce proceedings.
Since 1942, divorced spouses that pay alimony to their ex-spouse have benefitted from the ability to deduct alimony payments from their income tax return. Although those alimony payments count as income to the receiving spouse, some would argue that the receiving spouse also benefits from the deduction by way of an increased award of alimony.
Why the change?
Congress estimates that the new tax law repealing this deduction will add $6.9 billion in new tax revenue over 10 years, which will help pay for the $1.5 trillion tax cut plan. Further, those who wrote the change claim the alimony deduction allowed divorced couples to achieve a better tax result than married couples. Family law attorneys and their clients disagree with this logic: Splitting one household into two greatly increases a couple’s expenses, sometimes well beyond the savings from this tax deduction.
How will this change affect alimony?
Those already divorced will be unaffected. However, there is potential concern for spouses that included the deduction as a part of their already-signed prenuptial agreement.
Currently, the deduction motivates the payor spouse to agree to an amount thought fairer by the receiving spouse because of the tax break the payor earns. For example:
- If the higher earning spouse is taxed at 33% and pays $30,000 in annual alimony, the deduction amounts to approximately $9,900 in tax savings to the payor.
- If the lower earning spouse is taxed at 15%, they will pay approximately $4,500 in taxes on that $30,000.
- Between the two spouses, they save approximately $5,400 in taxes.
Courts have long factored these tax savings into their analyses. Without the tax savings, the higher earning spouse will press for a lower amount of alimony. Although the receiving spouse will no longer be taxed on their alimony award, they may still receive a significantly smaller award. Family courts will likely modify their future awards in divorce cases from established precedent with this change in law.
Are there other potential concerns?
Until sometime in 2019, when courts begin deciding cases under the new IRS law, it’s difficult to predict all the changes that will occur. However, there could be other potential concerns, particularly for the payor spouse with the loss of this deduction:
- Will the loss of this deduction push the payor spouse into a higher tax bracket?
- Will the loss of this deduction require the payor spouse to pay an increased amount of child support?
- Will this change increase the amount the payor spouse contributes to child care and medical expenses?
What should those considering divorce do?
The new law will affect alimony awards executed January 1, 2019, and after. If alimony is likely to be a part of your divorce settlement agreement, you may want to quickly file and get it settled prior to 2019. The first step is to discuss the divorce with an experienced Georgia family law attorney or divorce lawyer as soon as possible.