Understanding How Tax Reform Affects Spousal Maintenance

 Posted on January 05, 2018 in Divorce

In December of 2017, Congress passed a landmark tax reform bill, and this update to the law made a number of significant changes that will affect nearly everyone in the United States. One key change that people should be aware of is how spousal maintenance (also known as alimony or spousal support) will be taxed.

Taxes on Spousal Support

Following divorce, the spouse who earns a higher income may be required to make maintenance payments to the lower-earning spouse, with the amount and duration of these payments being based on the income each spouse earns and the length of the marriage. Under current law, maintenance is tax-deductible for the paying spouse, and it is considered taxable income for the receiving spouse.

The tax reform bill has eliminated this deduction, and spousal support will now be treated the same as child support. This means that the paying spouse will not be able to deduct the amount of maintenance payments from his or her taxable income, and the payments will not be taxable for the payee. This change will apply to divorces which are commenced after December 31, 2018.

How Will This Change Affect Your Divorce?

The existing law often allowed divorcing spouses to reach agreements which were beneficial for both spouses. Since maintenance was tax-deductible, a spouse making payments may have been able to reduce his or her income to a lower tax bracket, and the receiving spouse would pay less taxes, resulting in more money to be allocated between both spouses. Following the implementation of the new law, alimony payments will likely be lower, since the paying spouse will be paying more of his or her income as taxes.

Spouses who are divorcing in 2018 should be aware of how this change will affect the maintenance and child support which they pay or receive. They should also understand how the division of assets and debts will affect their taxes. In addition, married spouses who have a prenuptial agreement which specifies whether one spouse will pay maintenance in the case of divorce may need to update their agreement to reflect this change in the law.

Contact a Palatine Divorce Lawyer

If you are considering divorce or have already begun the divorce process, the knowledgeable, experienced attorneys of A. Traub & Associates can help you understand how your divorce will be affected by the new tax law. We can work with you throughout the divorce process to ensure that you will be able to maintain financial security as you move on to the next stage of your life. Contact our Schaumburg divorce attorneys at 630-426-0196 to schedule an initial consultation.

Sources:

http://money.cnn.com/2017/12/15/pf/taxes/alimony-tax-bill/index.html

https://www.pbs.org/newshour/politics/how-the-tax-overhaul-will-affect-alimony-deductions