Can I Deduct Alimony Payments From My Taxes?

Since 1942, individuals who pay alimony have been able to deduct their payments from their federal tax return, resulting in some tax savings to the alimony payor. But those tax deductions are now gone. This staple of divorce law was eliminated in a recent federal tax overhaul. The new law will affect alimony awards executed through a divorce agreement or court order on January 1, 2019, and after.

Under the new rules, alimony payments will no longer be deductible and will not count as taxable income to the spouse who is receiving alimony. For legal advice on these matters, reach out to an experienced family law attorney.

What Is Alimony?

Alimony, also known as spousal maintenance or spousal support payments, is money that the family court may order one spouse to pay the other in the event of a divorce. It is typically guided by the needs of the recipient, as well as the ability of the other to pay.

“You could need $10,000 per month, but if the other person doesn’t make sufficient money, you’re not getting it,” says David Starks, a family law attorney at McKinley Irvin in Kirkland, Washington. “On the other hand, one person could make $20 million a year, and the court’s still going to look at what you really need. It’s not typically going to just order the other person to pay you $1 million of it.”

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Why the Tax Law Change?

“For 50 years or more, there has been an alimony deduction,” says Starks. “That’s no longer going to be tax-deductible to the person who pays it. It will no longer be income that the person who receives it has to report on their income tax return.”

Those who wrote the Tax Cuts and Jobs Act (TCJA) claim the alimony deduction allowed divorced couples to achieve a better tax situation than married couples. Alimony payors will likely respond that paying taxes on income they do not receive is unfair. Splitting one household into two dramatically increases the couple’s expenses.

The increased expenses to each divorced spouse were likely more than the savings from this deduction. Further, repealing this deduction, which adds $6.9 billion in new tax revenue over 10 years, will not go far in covering the $1.5 trillion tax cut.

How Will the Tax Law Change Affect Alimony?

The tax break the alimony-paying spouse earned may motivate the alimony payor to agree to an amount considered fairer by the receiving spouse. The loss of the tax savings from this deduction will result in lower alimony awards because there will be less money, or income, in play. For example:

• If the higher-earning taxpayer’s tax bracket is 33 percent and they pay $30,000 in annual alimony, the deduction amounts to approximately $9,900 in tax savings to the payor.
• If the lower-earning ex-spouse’s tax bracket is 15 percent, they will pay approximately $4,500 in taxes on that $30,000.

Family 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 recipient spouse will no longer pay taxes on their alimony award, they may receive a smaller award. Courts will likely modify their future awards in divorce decrees with this change in law.

“The money the payer pays is going to be taxed first, at that higher marginal rate,” says Starks. “But in general, the court is going to simply look at what the former spouse needs. And knowing that they don’t have to pay taxes on it means they’re not going to get quite as much on their gross amount as they would have if they’d received maintenance the old-fashioned way.”

Are There Other Concerns?

Those already divorced and paying alimony are not affected. However, there is a potential concern for spouses who included the deduction in their already-signed prenuptial agreement. Those terms may now be invalid.

It is difficult to predict all the tax changes that will occur until courts begin deciding cases under the new law sometime in 2019. However, there could be other concerns with the loss of this deduction, especially for the payor spouse.

• Will the loss of this alimony tax deduction push the alimony payer into a higher tax bracket?
• Will the loss of this deduction require the payor spouse to pay an increased amount of child support payments as well?
• Will this change increase the amount the payor spouse contributes to child medical expenses and child care expenses?

What Should I Do if Considering Divorce?

There is little that future alimony payors can do about the IRS change to nondeductible alimony. For tax questions about federal and state tax preparation, talk to your tax professional. If you have questions about alimony or spousal support, you should seek legal advice from an experienced family law attorney.