As we detailed in our last blog, if you are contemplating getting divorced or looking at a possible modification of the orders regarding spousal maintenance, then the new tax law will have a significant effect on both parties.
Looking at it from the perspective of the trenches in family court, there are some clear winners and clear losers as a result of the change in tax treatment for spousal maintenance payments.
- The federal and state government –the government still taxes spousal maintenance payments, but it will receive more in tax revenue because effective January 1, 2019 spousal maintenance payments are not tax deductible by the paying spouse. So, it will be taxed at the paying spouse’s applicable tax rate (higher rate) rather than the old way which was taxing it at the receiving spouse’s rate (lower rate). The parties obligated to pay spousal maintenance are the bigger “earners”, having a larger applicable tax rate – sometimes even twice the rate
- applicable to the receiving spouse – which means more actual tax dollars being paid into the federal government for it to spend.
- Party receiving spousal support (for orders entered after 01/01/2019) – it is “tax free” money, like child support, that they neither have to claim or account for on their income tax returns.
- Party paying spousal support under existing orders – as long as the order was entered prior and is not modified after 01/01/2019 then the paying spouse still receives a significant tax deduction for all spousal maintenance payments made.
- Party paying spousal support on orders entered after 01/01/2019 – not only will these parties be paying spousal maintenance to their ex, but they will also be taxed, at their full rate, on these same monies that they won’t even see (particularly when it is taken out of their check directly by income withholding order). This change can and will likely result in thousands of dollars in additional taxes when your actual take-home pay has remained the same.
- Party looking to receive support after 01/01/2019 – Spouses looking for alimony or spousal maintenance after January 1, 2019 are going to see significant pushback and should expect heated litigation over eligibility let alone amounts and duration for spousal maintenance awards based on the financial penalty faced by the paying spouse after that date. It will be significantly tougher to resolve cases that involve spousal maintenance outside of court as a result.
- The courts – with more hard-fought litigation expected with relation to spousal maintenance and correspondingly less out of court settlements, family law courts will see many more cases being taken to trial or returning for modification and the court’s already crowded calendar will become more problematic with cases that took months taking years and cases that took years taking decades.
In our next blogs, we will outline some actual calculations and examples to show the practical effect the elimination of this tax deduction may have on your pocketbook and discuss some new strategies to consider in negotiations regarding spousal maintenance in light of these changes.
Going through a divorce and understanding the effects of the latest legislation on your future income and support payments can be a daunting task. Having an experienced attorney to advise and assist you with navigating these issues is essential to protecting you, your pocketbook and your peace of mind.
If you would like to work with one of our experienced divorce attorneys, please call OWENS & PERKINS at (480) 994-8824 to schedule your free 30 minute consultation.