New federal tax plan comes with changes affecting alimony

The new tax plan makes some powerful changes affecting alimony starting Jan. 1, 2019.

Right now, if your divorce decree or separation documents are already finalized, the spouse who pays the alimony can deduct it from his taxes, possibly lowering him into another tax bracket, and the person receiving the alimony must pay taxes on it as income.

Starting in 2019, the one who pays cannot deduct alimony and the one who receives no longer declares alimony as income.

“Initially, my thought is that it will make compromise more difficult,” Las Vegas family law attorney Ishi Kunin said. “I think at least initially payers will want to pay less since they get no tax benefits.”

The payer, generally a man, will be more affected negatively by the inability to receive a tax benefit, Kunin said.

“But big picture, if the courts order amounts that are significantly less by considering the tax implication, there would not be any actual impact,” she said.

Her gut instinct says judges will just look at the numbers without regard to tax effect.

It will be more obvious in divorces among the wealthy, she predicted.

“If the spouse is paying $5,000 a month and cannot deduct it, that $5,000 is more like $7,000,” she said. “It’s likely the one paying is going to ask the one receiving to accept less alimony.”

If alimony puts the paying spouse in a lower income bracket, that could be incentive to go ahead and do the divorce this year instead of delaying.

The change is not retroactive, so if you’re already divorced, alimony remains deductible for the one paying and taxable for the one receiving.

Orders that exist before Jan. 1, 2019, but are modified after that date will continue to be treated on pre-2019 rules unless there is language specifically stating otherwise.

I first heard about the alimony changes from Stephen Waldron, a Las Vegas CPA, who explained tax changes to a group of locals interested in finding out how the Tax Cuts and Jobs Act makes a difference in their lives.

Although taxes and divorce are no laughing matter, Waldron joked that the act “suggests that many politicians intend to get divorced by 2019.”

Fortunately, it won’t change my taxes because I’ve never been divorced, but I thought this could be worthwhile information since Nevada ranks seventh-highest in number of divorces per 1,000 people. Many will not be aware of these ramifications.

Alimony payments have been deductible for 75 years. Some tax and divorce experts predict that the change could result in less spousal support and in divorced couples paying more in taxes. But it will be a while before the results are known.

Divorce lawyers need to bone up on the changes in the tax code, and spouses about to become ex-spouses should at least take these changes into consideration.

A few things to know:

— Don’t think you can divorce and live in the same home for the tax benefits. That won’t be legal.

— Child support doesn’t change. It’s not tax deductible now and isn’t income to the parent caring for the child. It’s set by a formula.

— It’s not legal to pay higher child support in order to be able to deduct payments, the Internal Revenue Service warned.

So why reverse this element of the tax code? According to The Associated Press, the House Ways and Means Committee described the alimony deduction as a “divorce subsidy” because a divorced couple might pay less in their combined taxes than a married couple might. Government officials also said repealing the deduction will add $6.9 billion in new tax revenues over 10 years.

Personally, I hope no one decides to divorce before the end of 2018 because they think it will give them an advantage in negotiations. I’ve seen people keep working on their marriage and actually succeed. That’s the best result.

The Beatles’ “We Can Work It Out” always resonated with me.

Jane Ann Morrison’s column runs Sundays in the Nevada section. Contact her at jane@reviewjournal.com or 702-383-0275. Follow @janeannmorrison on Twitter.