A new tax bill has a lot of people wondering how it will affect them – including people who pay or receive alimony. In the past, spouses who paid alimony weren’t taxed on the money they provided to their former spouse. Unfortunately, it appears as though the new GOP tax law will eliminate this. Now, spouse who get divorced and pay alimony in the future could see a significant increase in their tax lability.
The basics of current alimony taxation
Under the current law, a person who pays alimony can deduct that amount from their taxable income. This makes it easier for that payer when it comes time to pay their taxes. Here’s one example. Let’s say that a man earned $225,000 in a year. The current laws would have him in a tax bracket of 33% but if he paid $50,000 a year in spousal support, then his taxable income would be $175,000. This puts him into a lower tax bracket of 28%, which means instead of paying $74,250 in taxes he’d pay just $49,000.
On the receiving end, the spouse who’s getting alimony pays tax on it just as though it’s income. In the example above, if a person was a full-time homemaker and her only income was the $50,000 in alimony, then she would be in a 25% tax bracket that would mean a tax bill of about $12,500. Of course, with the Earned Income Tax Credit, Child Tax Credit, and others, her liability would likely be much lower.
The new method of taxing alimony under the GOP tax bill
The new law gets rid of the alimony deduction the paying spouse gets. This affects couples who get divorced on or after January 1st of next year. The person earning $225,000 and paying $50,000 in alimony would still be taxed on their entire income and would be in the higher tax bracket we discussed. The person receiving the $50,000 in alimony would also still pay tax on their support. Essentially, that income is being taxed twice.
What impact could this have on future divorce settlements?
At Kendall Gkikas & Mitchell, we don’t yet know the impact it will have as it hasn’t gone into practice yet. We expect that some spouses would be less willing to pay spousal support if they knew that they’d still be fully taxed on it. This would effectively reduce their income, which could make their spousal support a larger burden on their life.
If you’re thinking of getting divorced, now may be the time to do. This is a hard decision to make that you’re likely not going to want to consider solely based on your tax situation. However, we do advise that you speak with an attorney who can help you understand how it would directly impact your situation. Contact Kendall Gkikas & Mitchell at 909-482-1422 today and we will go over your options. There’s nothing wrong with getting a legal opinion, even if you’re not yet ready to file papers. Call today to gather more information.
