By David J. Marquardt
Alimony, sometimes called spousal support, is often one of the more unpredictable outcomes in any divorce case. As a result, disagreements over the amount and duration of alimony awards can lead divorcing parties to incur substantial expenses in an effort to either come to an agreement or argue an alimony case in court.
The Tax Cuts & Jobs Act, signed into law in December 2017, will have a significant impact on divorce cases involving alimony. As part of this new federal law, starting with alimony agreements and court orders entered into after December 31, 2018, alimony payors may no longer deduct any payments from their gross income, and alimony recipients are not required to include any payments as income. This change applies to all agreements and court orders starting in 2019, as well as all modifications to pre-2019 court orders starting in 2019.
Why is this significant?
A little background is important to answer the foregoing question. For more than 70 years, federal tax law has allowed alimony payors to deduct payments dollar-for-dollar from their gross income, and has further required alimony recipients to include those same payments dollar-for-dollar as income.
Historically, there have been two major arguments in support of this provision in the tax code.
The first reason for deductibility of alimony payments and taxation of alimony receipts is based on pure fairness. The policy is that alimony payors should not be taxed on income that they received, but are legally obligated to give away and which they are not able to use. Likewise, recipients should not be given money completely tax free. Otherwise, the argument goes, the higher earning spouse is penalized and the lower earning spouse is rewarded, which is unfair.
Second, and perhaps more importantly, is that the former provision theoretically keeps more money in both the hands of payor and recipient, due to the shifting nature of federal tax brackets. Instead of the higher earning spouse being taxed at an even higher rate, the lower earning spouse is taxed at a lower rate.
Regardless of the strength and credibility of these arguments, the new law will have a major effect on family law cases, namely those divorce cases involving alimony. Negotiation of alimony agreements and the presentation of alimony cases in court will become that much more contentious, at least at the outset, while judges, attorneys, and parties alike try to determine what monetary effect various awards will have. Additionally, in cases where the higher-earning spouse is also in a higher tax bracket, which represents most alimony cases, there will be less funds to divide between the parties. Less funds, however, does not equate to less expenses, so money will be that much more important to each side.