The New Tax Plan Puts Divorcing Couples in the Penalty Box
The new tax plan may make your divorce a little more expensive. The biggest reason is that under the new plan, spousal maintenance (commonly referred to as alimony) is no longer going to be a tax deduction to the person paying it and taxable income to the person receiving it.
What is Spousal Maintenance?
Spousal Maintenance is Washington state’s version of alimony. It’s a discretionary tool our courts use to allow divorced couples to continue to share income. The quintessential scenario looks something like this: A couple has been married for eighteen years and the Wife is a high-earning executive in a tech company and the Husband is an artist who wants to go back to school to become graphic designer. Spousal support might be awarded to help him with the transition until he can earn more.
What Did People Like About Our Current Tax Plan?
Currently, alimony is a tax deduction to the payor (the Wife in the scenario above), and it’s income to the recipient. (See 26 U.S. Code Section 71.) The idea is that the payor is likely to be paying taxes in a higher tax bracket than the recipient. So, in theory, by shifting the tax burden to the lower-income spouse, the divorcing couple pays Uncle Sam less in taxes.
How Does This Change in the New Tax Plan?
Under the new tax plan, spousal support is not deductible by the payor spouse (the Wife in the scenario above). Nor is it treated as income to the recipient spouse (the husband in the scenario above). The intent of this new provision is to follow the holding in Gould v. Gould, 245 U.S. 151, 38 S. Ct. 53 (1917). In that case, the United States Supreme Court held that spousal support payments are not treated as income to the recipient. Consequently, there is no shifting tax burden – income used for spousal support payments is taxed at rates applicable to the payor spouse (who is typically the higher-income spouse), not the recipient spouse. Treatment of child support does not change (i.e. child support is not treated as spousal support).
The Good News:
Collecting income tax from the higher-wage earning spouse is supposed to increase tax revenue for our country by $8.3 billion dollars over the course of ten years.
The Bad News:
It could be argued that it’s a little unfair to both parties in a divorce. It seems a little unfair that the payor (the Wife in our scenario) has to pay income on money that s/he really doesn’t get to spend. Worse yet, the payor has little incentive to continue to share income. In other words, the recipient (the Husband in our scenario) may have more trouble negotiating spousal support in a divorce because it’s no longer a deduction to the payor.
When Does This Take Effect?
As of right now, if you finalize your divorce by December 31, 2018, your alimony payments will be grandfathered in to the old Tax Plan, so the payor can deduct it and the recipient claims it as income. The new provision applies to divorces finalized after December 31, 2018.
If you are contemplating a divorce and you think you may be seeking spousal support or may be paying spousal support, get in to see a divorce lawyer and talk to your CPA. You can’t be proactive enough about educating yourself given these changes – especially when King County divorces typically take at least one year. Give us a call. (206) 547-1486.