Effects of Tax Cuts and Jobs Act on Maintenance Tax Deduction
The final version of the Tax Cuts and Jobs Act signed by President Donald Trump on December 22, 2017 includes a change to maintenance (also known as alimony or spousal support) with major implications on pending and future family law matters. This change does not affect child support, as child support is calculated separate from maintenance and does not offer a deduction for the paying party.
When maintenance is involved in a divorce, there is likely a disparity in incomes between the parties. Where there is a disparity in incomes, there is often a disparity in income brackets for tax filing purposes. The current tax law allows for maintenance payments to be tax deductible to the party paying maintenance (‘payor’) and taxable as income to the party receiving maintenance (‘payee’). The payee is typically taxed at a lower rate on the claimed maintenance payments. This tax benefit is factored into negotiations by the parties when maintenance is at issue to equalize the parties’ monthly incomes.
Under the new law, payors subject to maintenance agreements entered after December 31, 2018 will not be permitted to deduct maintenance payments. This change could result in less net income available to the parties, as the tax burden is shifted from the payee to the payor. If the payor is in a higher tax bracket than the payee, more of the overall payment will be taxed. A skilled and knowledgeable attorney will be beneficial in assisting you on how to best negotiate and structure settlement agreements once this change takes effect after December 31, 2018.
The Family Law group at DeWitt is experienced in assisting parties in navigating all facets of the divorce process, including financial and property issues. Although our attorneys have extensive litigation experience, litigation is seen as the last resort, and we are often successful in resolving conflicts through informal and formal mediation. If you or someone you know has any questions or concerns relating to divorce, we are happy to answer questions and assist as needed.