Late last year, the Republican-led Congress passed a sweeping new tax plan. It’s going to impact deductions, retirements savings, and even private jet ownership. Basically, everyone should plan to feel the brunt in one way or another. It will reach into almost every aspect of daily life, and that includes divorce.
Specifically, the new tax plan will leave the biggest lasting impression on spousal support; new regulations do away with the tax deduction for spousal support payments.
It will come into play for divorces and separations after Jan. 1st, 2019, and it does have the potential to not only alter way courts and attorneys approach spousal support, but it may change the way people negotiate divorce settlements in a larger sense. At least from the point of view of many experts.
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What Is Spousal Support?
Spousal support is court ordered payments intended to lessen financial hardship for dependent spouses after divorce. It’s often called alimony in everyday conversation. It can last for a short time. For example, until one party gets back on his or her feet. In other situations, payments continue indefinitely.
Spousal support most often comes into play when there’s a significant gap in earning potential between spouses. It also figures into cases of substantial financial need.
Many factors influence the amount of spousal support payments.
Courts often consider:
- Length of the marriage.
- Job prospects,
- Future earning potential,
All of this leads to a number and duration.
By and large, it’s men who pay spousal support. According to the U.S. Census Bureau, last year, 243,000 people received spousal support. 98% of recipients were women.
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Changes In The New Tax Plan
The new tax plan makes one major change to spousal support. It abolishes a tax deduction that’s been on the books for more than 70 years. For divorce settlements after December 31, 2018, the paying spouse will no longer be able to deduct this amount. At the same time, the recipient will no longer have to pay taxes on that money. As it stands, the opposite is true.
The current situation gives the payer a major “above the line” deduction as opposed to an itemized deduction. This change also means the recipient won’t have to claim the payments as income. That amount will remain un-taxed. You can imagine why this is a huge deal for both parties involved.
Many experts anticipate the upcoming shift will alter negotiations for divorce settlements. The deduction often saves the payer a substantial sum, which leaves more money to divide between exes. The new way reduces the gross amount and washes away the benefits of the deduction.
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Spousal Support Modification
When it comes to modifying spousal support, the new tax plan will also have an effect. Again, it impacts settlements after 2019, not deals already in place. But those who seek to alter existing agreements will feel the impact.
In order to modify spousal support, you have to show a significant change in financial circumstances. This can be up or down. But the new regulations may create a chilling effect. Even for those who have a legitimate claim for reduction.
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Pro Tax Plan Arguments
Despite what it may look like, some see potential benefits in the new tax plan. The House Ways and Means Committee refers to this new legislation as a “divorce subsidy.” They say, “A divorced couple can often achieve a better tax result for payments between them than a married couple can.”
And they’re not alone in seeing positive outcomes. According to the Joint Committee on Taxation, the congressional commission that investigates tax issues, they see more value. In their estimation, getting rid of this deduction could result in $6.9 billion in new tax revenue in the first ten years.
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Anti Tax Plan Arguments
Though some see possible benefits, others have criticized the new tax plan. Opponents claim the higher earning spouse will wind up paying less spousal support. And on the other side, the recipient will receive less.
As it currently stands, one side winds up with a lighter tax burden. The other receives more money than they might otherwise. This setup allows for larger payments and lower costs after taxes. The greatest fear is that, once this changes, the person in the most need will get less in terms of money and support.
One assessment estimates payments under the new laws may drop by as much as 10% to 15%. Less money could make it harder to pay bills and make ends meet. Which many view as defeating the entire purpose of spousal support in the first place.
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One thing is clear, the new tax plan will have a substantial impact on spousal support moving forward. As is so often the case in these situations, we’ll have to wait and see exactly how. But it has the potential to change the way people approach divorce, divorce settlements, and even the overall negotiation strategy.
That said, this won’t stop anyone from ending their marriage. People don’t usually divorce for the tax break. When your marriage is over, it’s over.
Though it’s often an important element, spousal support is just one piece of the divorce puzzle. How it all works out depends on the details of each particular case. Every couple has their own unique set of finances. And as a result, every divorce settlement is specific to the people involved. However, most divorces that include spousal support will feel the effect of the new tax plan.
If you have questions about divorce or spousal support, contact Goldberg Jones at our Seattle office.