The New Reality of Spousal Support Under the Tax Cuts and Jobs Act
Effective January 1, 2019, a new era was ushered in for family law practitioners, clients, and anyone finalizing their divorce or dissolution. The impact of the new tax law on spousal support orders and divorce settlements is significant.
What was the law?
For almost 80 years, the spouse paying spousal support could deduct the amount he or she paid from his or her federal income taxes, while the spouse receiving the support had to pay taxes on all the spousal support he or she received. Because, the spouse paying the spousal support was usually in a higher income tax bracket, he or she often benefited from the tax savings. This tax break encouraged spousal support settlements, often a contentious issue between couples.
What has changed?
Under the new law, the tax burden has been switched. Now, the spouse paying spousal support must pay taxes on all the spousal support he or she pays while the spouse receiving the support does not. The result? A reduction of the paying spouse’s ability to pay spousal support due to the increased tax burden, which will no doubt discourage settlement and lead to increased litigation. The real winner? The federal government. According to committee reports, the government estimates that it will generate billions of dollars in new tax revenue over the next 10 years.
How does this affect you?
For couples who finalized their divorce on or before December 31, 2018, there is no change to their existing agreement and to the deductibility of paid spousal support going forward.
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