New Tax Reform Bill and Spousal Support Changes
President Trump signed the new tax reform bill December 22, 2017. Among the many changes to tax law, the final bill eliminated the tax deduction for spousal support or alimony payments.
In the Commonwealth of Virginia, alimony, the legal obligation imposed on a person to provide financial support to their spouse after marital separation or divorce, is called spousal support. Currently, spousal support, unlike child support, is not based on a formula that dictates what one spouse will receive and the other will have to pay. Spousal support is decided on a case-by-case basis and most often involves negotiation as part of any divorce settlement agreement. If one of the parties asks for spousal support and the two parties cannot agree, then spousal support can also be ordered by the judge based on a number of factors, including:
- Length of marriage
- Standard of living
- Income of both spouses including property and assets
- Minor children and their ages
- Age and health (physical and mental) of both spouses
- Earning potential of each spouse
- Current living expenses
- Financial support and contributions each spouse made to the other’s education and career during the marriage and to the well-being of the marriage
- Potential to receive inheritance or other assets
- Retirement benefits
- Financial obligations of each spouse
- Time needed for dependent spouse to seek employment or earn the qualifications needed to obtain gainful employment
- Tax consequences to each party
How does the new law affect my taxes?
Right now, spousal support payments are tax deductible by the payor and they’re taxed like regular income to the recipient. Since the recipient typically makes less money, and is usually in a lower tax bracket, this tax treatment tends to keep more money in the former family unit. According to the IRS, about 600,000 Americans claimed an alimony deduction on their 2015 tax returns, the most recent year for which data is available.
Under the new tax bill, spousal support will be treated, for tax purposes, like child support. For any divorce or separation agreement signed after December 31, 2018, or signed before that date but modified after it, spousal support payments will no longer be deductible by the paying spouse and are also not included as income by the recipient spouse. In other words, income used for spousal support will be taxed at the often higher rate of the payor spouse.
The new tax law generally won’t affect anyone who is currently paying spousal support, but it will mean couples and their attorneys will need to change their thinking for divorce proceedings in 2019 going forward. The new tax law has shifted the incentives for the parties. The tax burden by the payer spouse will now increase by the amount of his/her marginal tax rate. The tax burden on the recipient spouse decreases accordingly. For couples currently in divorce negotiations or under an existing arrangement where future spousal support is modifiable, couples and their attorneys should consider adding language in their spousal support provisions to address this new tax treatment.
It’s not just future divorces that will be affected by this change in the tax law. This will also affect prenuptial agreements. Prenuptial agreements usually contain language that states what spousal support would look like should the couple get divorced. Until now, those clauses have typically been drafted assuming the current alimony tax deduction will be in place. Eliminating the spousal support tax deduction may have implications about how property settlements are reached. This could make some divorce settlements more difficult to achieve.
About Melone Law, P.C.
Melone Law, P.C. is a general practice law firm based in Reston and serves the Northern Virginia area. Our practice areas include Family Law, Divorce and Special Needs Children, Traffic Ticket Defense, DUI/DWI Defense, and Trust and Estate Law. Our philosophy is to provide all of our clients with the highest quality legal representation, innovative legal solutions, and unsurpassed dedication to customer service. Through our high standards, we strive to be a trusted resource to our clients.
We know from experience that a successful attorney-client relationship depends on our ability to understand your needs and objectives. For more information about the new tax law and spousal support and our family law practice, contact our office today at 703.995.9900 or visit our website: www.MeloneLawPC.com.