Under the Tax Cuts and Jobs Act (“H.R.1”), recently signed into law by President Trump, big changes are coming in 2019 to the tax treatment of alimony, or spousal maintenance, as we call it here in Minnesota.
Spousal maintenance refers to payments after a divorce from an ex-spouse that earns a higher salary or has higher income, called the “payor,” to the ex-spouse with a lower salary or income, called the “payee.” Under current tax law, these payments are deductible on the income tax returns of the payor and are taxed as income to the payee. This means that these payments are taxed at a lower rate because the payee will usually be in a lower income tax bracket than the payor and less money is ultimately paid in taxes on these payments. However, under H.R.1, all of that changes.
Under H.R.1, for any couples commencing divorce after December 31, 2018, spousal maintenance payments will not be deductible on the income tax returns of the payor and will not be included as income for the payee. This shifts the tax burden from payee to the payor and results in more money being paid in taxes in these types of situations because the payor will likely be in a higher income tax bracket than the payee.
Although H.R.1 shifts the tax burden to the payor and the payee arguably may be more willing to accept lower spousal maintenance payments because they will not be taxed on them, it may ultimately lead to lower spousal maintenance payments. This is because there is only so much money to go around in these types of situations and the law increases the tax burden on these payments by taxing them at higher rate.
This statute may make divorces harder to settle and lead to more litigation and attorney fees because the tax deductibility of the spousal maintenance can be a selling point for a higher spousal maintenance payment. Certainly, payors are losing a significant tax benefit because they can no longer deduct these payments from their income and more will be collected in taxes on spousal maintenance payments because these payments will be taxed at the higher tax rate of the payor.
For couples that are planning to file for divorce and want spousal maintenance to be deducted from the payor’s income and treated as income to the payee, it is not too late to act, but the divorce must be commenced prior to 2019 for them to enjoy the current tax treatment of spousal maintenance. To speak with a divorce attorney experienced with spousal maintenance, who can fully advise you regarding the tax treatment of spousal maintenance payments, contact Tentinger Law Firm at 952-953-3330 or use our quick contact form.