Important Federal Alimony/Spousal Maintenance Tax Changes: For divorce and separation agreements or divorces finalized on or after January 1, 2019, the December 22, 2017 tax reforms in the Tax Cuts and Jobs Act (TCJA) eliminated an important and valuable tax deduction for the payer of alimony/spousal maintenance and also eliminated the requirement of the receiver to report these payments as taxable income. Any divorce and separation agreements or divorces finalized before the end of 2018 will continue to be governed by the old law and the alimony deduction and alimony income reporting will still apply. Read about Texas alimony.
For modifications (changes) on or after January 1, 2019 of previously ordered alimony, the old law will apply unless the former spouses include a provision in the modification that they agree the new law applies. Just to be safe, however, it is a good idea for former spouses who modify alimony after January 1, 2019 to re-state their desire to keep the alimony tax deductible by the payer and taxable to the receiver if they wish for the old law to continue to apply. This is because the old law deduction for alimony/spousal maintenance is an important and valuable benefit for the spouse who receives alimony, not just for the spouse who pays it as you can see below in the comparison of between old and new alimony tax laws.
Why the alimony/spousal maintenance tax change matters to you:
Here we illustrate how a receiving spouse may retain more alimony after paying taxes under the old law than not paying taxes under the new law. Something else to consider that could make alimony go a lot further: under the old law, a spouse receives alimony pre-tax which s/he can deposit into an IRA to save for retirement.
Hypothetical: Suppose the spouse who pays alimony/spousal maintenance can afford to pay only $750 per month to the receiving spouse and the paying spouse’s income tax rate is 25% (there is no current 25% tax rate; but it works here for easy illustration). Assume the receiving spouse’s income tax rate is 10% (which is a current tax rate).
Result under old law with alimony/spousal maintenance deduction: When the paying spouse can deduct the alimony/spousal maintenance payments, the paying spouse can actually pay the receiving spouse $1000 per month. This is because the paying spouse saves $250 in taxes (25% x$1000) every month which meets the paying spouse’s $750 per month limit. The receiving spouse actually gets $1000 per month, and pays income taxes of 10% on that money, effectively giving the receiving spouse $900 per month. In other words, under the old law the receiving spouse gets $900 at a cost of $750 to the paying spouse.
Result under new tax law without alimony/spousal maintenance deduction: When the paying spouse cannot deduct alimony/spousal maintenance payments then the paying spouse can only afford to pay $750 per month and the receiving spouse only gets $750 per month. The receiving spouse gets $150 less each month than if the paying spouse had the deduction and the receiving spouse paid taxes on the money. Under the new law the receiving spouse loses money compared to the old law, even though intuitively it would seem like the receiving spouse would benefit from not paying income taxes on the alimony/spousal maintenance payment under the new law.
**The example above uses disparate tax rates between the paying spouse and the receiving spouse to illustrate the monetary effects of the old law versus the new law on the receiving spouse. The differences between the old law and the new law become less significant for the receiving spouse the closer the receiving spouse's tax rate is to the tax rate of the paying spouse.
Note: There is also an option under IRS rules under the old law to agree to make the alimony not deductible to the payer and not taxable to the receiver. This happens most often when the deduction will be fairly insignificant to the payer, or the length of payment is relatively short, and/or the differences between the payer and receiver’s tax brackets don’t result in a big enough savings to the payer to make it worth the trouble of the payer’s managing the accounting of the deductions and the receiver’s paying income taxes. If you like this option, you can figure out how much the deduction would be to the payer and then agree the payer will pay that reduced amount to the receiver with no tax implications to either of them. If the payer does not claim the deduction, then the couple can agree on when alimony ends or reduces without concern about IRS recapture rules.
A Detente mediator is ready to help spouses understand the law and the considerations for alimony in Texas, and together during mediation, to decide for themselves how to maximize their own best outcomes.