The Tax Cut and Jobs Act of 2017 will likely make 2018 the Year of the Divorce.
Anyone who has been contemplating divorce may be pushed to carry it out because of the
incentive created in the latest tax reform act.
For 75 years, the tax law allowed alimony (spousal maintenance) payments to be
deducted from the payor’s taxable income. However, the new tax law will no longer
allow the payor to deduct alimony payments nor require the payee to include alimony
received as taxable income. This change will be effective for divorce agreements
executed or modified after December 31, 2018.
Impact on Alimony
Unfortunately, alimony currently is a great tool in negotiating the final details of a
divorce and without the tax incentive, many divorce experts fear negotiations will be
more difficult and the payee spouse will receive less money because more will be going
As an example, assume alimony is set at $36,000/year and the payor spouse is in a higher
33% tax bracket and the payee spouse is in a lower 15% tax bracket. The payor would
have a tax deduction of $11,880 and the payor would pay tax of just $5,400 on the same
income. Between the two spouses, they save $6,480 in taxes and the payor spouse
received a tax benefit to make the payments more affordable and the payee spouse, who
actually received the money, would pay taxes on it. With the new tax law, the higher-
income spouse will have to not only pay $36,000 to the other spouse but, will have to pay
taxes of $11,880 on the $36,000 as well. Or, if the payor is only willing to pay the after-
tax equivalent the payment will be $24,120 while the payee spouse would expect the
same after-tax payment under the prior law of $30,600 per year.
Impact on Child Support
In addition, some states like New York, take alimony into effect when calculating child
support. Child support calculations currently take into account the combined net incomes
of both parties. Since the alimony payor’s net income will go down and the payee’s net
income will go up, the amount of child support received will go down if states do not
modify their formulas for child support.
Also, current prenuptial agreements may have assumed a tax deduction for alimony
payments which may have unintended consequences if not modified before December 31,
We have all heard of the marriage tax penalty but after 2018 there will certainly be a
divorce tax penalty as well.
If you are in the process of a divorce or contemplating one, let us help. Visit
http://www.hedleycpa.com/individual-services/divorce- financial-planning/ for more
information on how we can help.