The new tax law eliminates the tax deduction for alimony payments, potentially making marriages an even more hotly contested and costly process, especially for lower-income couples.
Although upper middle class and wealthy households can usually afford higher taxes on alimony payments, those with limited means-where a few hundred dollars per month (for a meal or a car payment) makes a difference in their quality of life-will experience the negative impact of the law.
Alimony, also known as maintenance or spousal support, is a monthly payment made by one spouse to another in accordance with either a settlement agreement or court decision. The purpose of alimony is to correct any unfair economic effects as a result of a divorce. In order words, they are the payments that one spouse gives to the other who earns less money.
At the moment, alimony payments are tax-free for the payer, while they’re taxed like regular income for the recipient. Since the recipient typically makes less money-thus in a lower tax bracket-it keeps more money within the family unit and away from the government.
The alimony deduction repeal would affect divorces filed after December 31, 2018. While the new rule does not make an impact anyone already paying alimony, it will lead to significant changes in future divorce proceedings.
Getting rid of the alimony tax deduction may also have plenty of other repercussions, such as affecting how child support is calculated and how assets are divided. This domino effect can make divorce settlements much more difficult to obtain, causing more litigation and resulting in more legal costs.
Furthermore, couples interested in creating prenuptial-and postnuptial-agreements need to take note. They are often clauses which outline alimony payments in the event of a divorce. However, those clauses have generally been drafted under the assumption that the alimony tax deduction is in place.
If you are interested in learning more about the new tax law and how it may affect your divorce, request a consultation with our New York family lawyer at Peter L. Cedeño & Associates, P.C. today.