New tax laws impact alimony

Divorcing Couple .jpeg

U.S lawmakers have changed a good bit of what we thought we knew about post-divorce spousal support, better known as alimony.

Under the existing law, when alimony is negotiated, the one who pays (invariably the high-income partner) can deduct the cost from his or her income tax.  The recipient, on the other hand, has to pay tax on that support received.

After midnight Dec. 31, 2018, that formula will be turned upside down.  The payer will lose the tax break completely and the recipient will be able to deduct the support.  Existing alimony decrees enacted before Dec. 31, 2018, will continue to follow the old rules.

Why was the change made?  Judge T.E. Cauthorn, founder of Cauthorn Nohr & Owen, speculates that someone in Congress wants to inhibit judges, courts and legislators from awarding alimony, probably on the theory that a support payment discourages people –– especially women, the primary recipients of alimony –– from getting a job and working like everyone else. 

“There is a lot in the Internal Revenue Service code that could be labeled ‘social engineering’ designed to encourage or discourage certain human behavior,” Judge Cauthorn says. “But it is important to consider this reality: When two people create a relationship that involves a dependency, there is an obligation to provide for the person who, willingly or not, became dependent.”

Take a case of a husband and wife who are both young lawyers. Early in their careers the two decide to have children, and the wife takes a leave of absence from her law practice, often for years at a time.  This time away from her practice puts her at a serious professional disadvantage, a sacrifice that needs to be accommodated if the couple divorces.

Under current law, the prospect of a tax deduction provides the husband an incentive to pay a fair amount of support.  Under the new law coming in 2019, that incentive will disappear.

“Over the years I’ve observed that the willingness to pay alimony is proportional to the tax benefit,” Judge Cauthorn says. “Take that away and the dependent spouse is likely to receive less.” 

Consequently, the change in the law is likely to lead to more contested divorces.  If that’s the case, each party to the divorce will need not only competent legal advice, but financial advice as well. 

The clock is ticking toward New Year’s Eve when the law will change, thus complicating already complex and emotionally charged situations.  The judge’s advice is simple: “If you want an uncontested divorce, do it this year. The high-income spouse is in a better position to be generous.  Next year, that incentive goes away.”

The CNO Team