January is “divorce month”, and 2019 brings new tax rules for couples who split up.
The GOP tax law was passed in December 2017, but it has taken time for certain laws to come into play. One of these laws changes the way spousal support, or alimony, payments are taxed and deducted.
Spousal support is an allowance paid from the higher-earning spouse to the lower-earning spouse during a legal separation and/or divorce. The amount and duration depends on a variety of factors, including the length of the marriage, age of spouses and degrees earned.
Previously, the payer would deduct the alimony and the recipient would be taxed on it as income. Therefore, the wealthier spouse would receive a tax benefit, and the less wealthy spouse pays the income at a lower tax bracket.
Under the new law, which affects divorces settled on January 1, 2019, and beyond, the wealthier spouse is responsible for paying taxes on the payments.
There’s an increased tax burden on the spouse paying alimony — and more money for the government
For example, a husband and stay-at-home wife earn a total income of $500,000. Upon divorce, the husband is to pay his former wife $150,000 in support payment.
Under the old law, the husband would get a deduction for $150,000 (husband’s tax bracket rate is 35%) and the wife pays income tax on $150,000 at 24% tax bracket rate.
Under the new law, the husband pays income tax on $150,000 (his tax bracket rate is 35%). There is no deduction and the wife does not pay income tax on $150,000.
There is an increased tax burden on the husband and a lessened tax burden on the wife, and the government gets more because the tax on $150,000 is borne by the husband at a higher rate.
These new tax rules do not apply on divorces that were finalized on or before December 31, 2018.
The new ‘SALT’ deduction limit may affect divorcing couples
The new tax treatment of spousal support payments isn’t the only part of tax reform that affects divorcing couples.
The GOP tax law capped the amount of state and local income taxes (SALT) a person could deduct at $10,000, which affects those in high income-tax states like California and New York.
Prior to the tax law change, someone with a modest spousal support payment, and perhaps a lump sum payment that generates investment income, could stay in a sizable marital home if they could also deduct a significant amount in terms of SALT deduction. With SALT deduction limited to $10,000, the overall tax burden is higher and it is becoming more difficult to stay in the marital home.
For more information regarding this topic, please contact our office.