After weeks of back-and-forth in Washington on the issue of supposed “tax reform,” there is a final determination of the issue concerning spousal support (alimony) deductibility. In order for spousal support to be tax-deductible you must fall into one of the following two categories:
- You obtained a spousal support order or entered into an agreement regarding the payment of support prior to December 31, 2018; or
- You modified an order that was obtained prior to December 31, 2018
Anyone who obtains an order for support commencing January 1, 2019 will not have the benefit of tax-deductibility when it comes to the payment of spousal support. Similarly, those who are the recipients of support ordered after January 1, 2019 will not pay income tax on the support received.
Tax deductibility of support was originally implemented in order to allow divorcing parties to maximize the cash available between their split households by shifting the tax burden from the payor of support – “the higher earner” to the recipient of support. Given that the higher earning spouse was already paying significant taxes on his or her earnings, but not receiving the benefit of all of those earnings because she or he had to pay support, shifting the tax liability to the other spouse to pay on what he or she received enabled the payor to have greater income available with which to pay. This resulted in higher support orders and more money available between the two households, because the spouse that was receiving support had lower income and therefore paid tax at a lower rate.
The loss of this deduction is going to be significant commencing January 1, 2019. Without the support deduction, the cash available between the two households will likely be less given that the higher earner will be paying tax on her or his gross income, then turning over some of that income to the lower earner.
As previously discussed, the irony in all of this is that while the “conservative agenda” seeks to promote “family values” – this provision has two implications that fly in the face of those values: 1) It incentivizes people to get divorced before January 1, 2019 to get the benefit of the deduction and 2) it reduces the amount of money available to support two households making things more difficult, especially for the children of divorcing families.