Much attention has been given to the corporate and individual tax rates that have been cut as a result of the new tax bill signed into law by President Trump in late 2017. But one of the most significant yet less discussed provisions of the new tax law is the changes to taxation for spousal support (or “alimony” as it is often called), which affects both the person paying the spousal support and the person receiving the spousal support. Ultimately, the changes mean more taxes will likely be paid between divorcing spouses for those divorces or settlement agreements finalized on January 1, 2019. Speak with a Virginia divorce lawyer to see how these changes could affect you.
Spousal Support Will No Longer Be Tax-Deductible By the Payer
Under the new tax law, spousal support payments will no longer be considered tax-deductible for purposes of federal taxation by the paying spouse, which changes a tax provision that had been around for many decades. Previously, a paying spouse could deduct all alimony payments off the top of their taxable income, which often resulted in large tax savings.
Similarly, spousal support payments will also no longer be taxable to the receiving spouse, meaning that spouse will not have to include those payments in his or her taxable income for the year. Again, these changes affect divorces and/or settlement agreements reached in 2019 and after, and will not affect those finalized in 2018.
Why Spousal Support Payments May Go Down in 2019
At first glance, those changes may seem like they simply shuffle the tax burden for spousal support payments back from the receiving spouse to the paying spouse, but there is a larger issue which will mean higher combined taxes for the paying and receiving spouse.
This is because the paying spouse in nearly all cases is earning more money than the receiving spouse, and so the paying spouse is subject to a higher marginal tax rate than the receiving spouse. Thus, the total alimony payments will be taxed at the higher rate of the payer rather than the lower rate of the receiver.
Here’s an example. A paying spouse pays $4,000 a month in spousal support and pays a top marginal tax rate of 35%. Under the rules in place until 2019, the paying spouse can deduct the entire $48,000 in payments over the year off the top of his or her income, resulting in a tax savings of $16,800. If the receiving spouse’s top tax rate is 24%, he or she would pay $11,520 in taxes on the payments. Putting the both of them together, that is a $5,280 (the difference between $16,800 and $11,520) net savings on taxes.
Under the rules that will take effect in 2019, however, those numbers would be switched. The receiving spouse would not have to pay $11,520 but the paying spouse would be required to pay the $16,800 in taxes on the previously deductible $48,000. Thus, $5,280 in extra tax payments would be going out the door. All in all, this suggests spousal support payments would be negotiated at a lower amount starting in 2019.
Working Together to Create a Spousal Support Agreement
It might be easy to look at the above numbers and simply say that the new tax law is bad for paying spouses and good for receiving spouses, but the truth is that tax laws will always be considered when two spouses are negotiating spousal support payments. With experienced counsel, the two parties can work together to create mutually beneficial solutions which consider the cumulative effect on both parties, including tax ramifications.
By working with an experienced family law attorney to finalize a divorce in 2018, it may be possible for both spouses to take advantage of more favorable law currently in place.
Schedule a Consultation With a Virginia Family Law Attorney Today
At Kurylo Gold & Josey, PLC in Fredericksburg, we will guide through all of your questions regarding all aspects of divorce and help you work towards a favorable outcome in your family law matter. To schedule a consultation with one of our Virginia family law attorneys, contact Kurylo Gold & Josey, PLC at 540.642.1766.