For over 70 years, spousal support was deductible from federal taxes for the paying spouse. Starting Jan. 1, however, this deduction will be eliminated under the new tax law. This has already made spouses hasten their divorce settlements and change their planning.
Its impact may vary. Spouses who paid alimony will lose money from the ending of this deduction. Recipients may profit because they no longer need to declare this support as ordinary income.
Families may lose out overall. The deduction allowed higher income spouses to shift income to the lower income spouse who paid less taxes and assured that there was more money for the family. The new tax law makes up the overall loss of revenue from its other reductions by removing the alimony deduction. Money that would have paid for spousal maintenance will go to the federal government in taxes instead.
Many spouses are rushing to settle cases before the end of the year to preserve their deduction, preserve higher support payments and avoid more difficult divorce negotiations. Couples are also trying to avoid the uncertainty because negotiations and settlements relied on this deduction. With the deduction and reduced tax liability, higher-income spouses were encouraged to be more generous with providing financial support.
Further complicating this matter, New York’s legal spousal maintenance guidelines were enacted in 2015 and relied on the federal tax deduction for support. Under these guidelines, state court judges had the discretion to consider the impact of taxes, the length of the marriage, each spouse’s earning potential and other factors while setting payment.
The office of administration for state courts does not plan to issue any guidance. Courts will have to rely more on the testimony of local accountants and the spouses’ negotiations on the impact of the loss of this deduction. Attorneys have argued that the state legislature should review current support guidelines when it reconvenes next month.
A spouse undergoing divorce should make careful preparations and review their options with an experienced attorney. A lawyer can help assure that they can reach a fair and reasonable settlement that meets their needs.