Can I Deduct Alimony Payments from My Income?
Due to the federal tax overhaul, maybe not
on May 24, 2018
Updated on February 8, 2021
Since 1942, divorced spouses that pay alimony to their ex-spouses have benefited from the ability to deduct alimony payments from their incomes. This staple of divorce law has been eliminated with the recent federal tax overhaul: For divorces executed in 2019 and after, alimony payers will no longer be able to deduct alimony payments from their income.
Why the change?
Those who wrote the law claim the alimony deduction allowed divorced couples to achieve a better tax result than married couples. However, outside of tax results, splitting one household into two greatly increases expenses—likely well in excess of the savings from this deduction. Repealing this deduction will add $6.9 billion in new tax revenue over 10 years; in total, taxes were cut by $1.5 trillion.
How will this change affect alimony?
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. Although those alimony payments count as income to the receiving spouse, some would argue that the receiving spouse also benefitted from the deduction by way of an increased award of alimony. For example:
- If the higher earning spouse is taxed at 33 percent 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 percent, 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 analysis. 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. Courts will likely modify their future awards from established precedent with this change in law.
Other potential concerns?
Those already divorced will be unaffected. However, there is potential concern for spouses that included the deduction as a part of their already signed pre-nuptial agreement. Those terms may now be invalid and need to be re-worked and agreed to.
Until courts begin deciding cases under the new law sometime in 2019, it is 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 pay an increased amount of child support as well?
- Will this change increase the amount the payor spouse contributes to child medical expenses and child care expenses?
What should those considering divorce do?
If alimony is likely to be a part of a divorce, a couple may want to file quickly, and get it settled prior to 2019. The first step for anyone in this position is to discuss their divorce with an experienced Tennessee family law attorney as soon as possible.