For about a generation, spousal support payments have been tax-deductible for obligors and alimony receipts have been tax-reportable for obliges. Effective January 2019, the times they are a-changin’. Payments will no longer be tax deductible and receipts will no longer be tax-reportable. According to some, the change is just a ripple in the ocean. According to others, it’s the biggest change to family law since California began the no-fault divorce revolution in 1969.
From an income tax perspective, the change is significant. Alimony payments were an above-the-line deduction. So, a potentially valuable tax write-off is disappearing. The change is significant for obligees as well. Without that “Alimony Received” line on their 1040s, their adjusted gross incomes may drop dramatically.
Why the Law Changed
Family law and tax law often overlap, and the alimony change is just one example. So, it’s important to be aware of the reason for the change as well as the underlying issues. And, it’s also important to refer the client to a family law attorney when necessary.
Spousal support has long been one of the most controversial elements in divorce settlements. Obligees often argue that these payments are necessary to help them become economically self-sufficient. And based on the poverty statistics for divorced women vis-à-vis divorced men, they may have a point. Fathers’ rights groups, on the other hand, have argued that alimony is basically a divorce penalty. Given the anecdotal evidence of subsequent wives working to subsidize their husband’s alimony payments, this argument may not be entirely far-fetched.
So, many states have significantly re-worked their alimony laws in recent years. Some have all but eliminated long-term spousal support payments, some have reduced the amount of payments, and some have done both. The 2019 tax law change is just the latest episode in a very long-running series.
Some Alimony Tax Strategies
As mentioned, the change will be significant for obligees. A lower adjusted gross income could be a good thing or a bad thing, depending on the context.
The remainder of this article will focus on tax strategies for obligors. Additionally, we will assume the obligor is the husband and the obligee is the wife. In almost all cases, that’s how it works.
Shifting alimony money to another area might be one way to salvage at least part of the tax deduction. Assume, as is quite common, Wife stays in the family home with the couple’s minor children and Husband relocates. In exchange for reduced alimony payments, husband might agree to pay the property taxes. If Wife agrees, it should not be a problem to place such a provision in the divorce decree.
Alternatively, a motion to modify alimony payments might be in order. Alimony factors vary significantly by state. Typically, they involve the husband’s ability to pay and the wife’s economic need. The alimony tax change clearly may affect the husband’s ability to pay. For example, Husband might have been able to afford $15,000 per year in spousal support. But with the deduction elimination, that ability could drop to $10,000 a year.
While it falls outside the tax planner’s purview, the wife’s economic need may change as well. The husband should keep a close eye on her financial status. If he has good reason to suspect a positive change, a motion to modify could be successful.
The 2019 tax law changes are the biggest ones to come around in a generation. Connect with us to help your clients get the information they need to make good choices.