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GOP Tax Reform Bill

GOP Tax Reform Bill

/ Family Law

In General

Spousal support, spousal maintenance, or alimony (these terms can be used interchangeably) is a hot topic in divorces, especially when you are divorcing parties who have been married for a long period of time. Previously, Greg authored a blog titled Spousal Support: Are You Really Getting Everything You Asked For? In that blog, Greg generally explains the purpose of spousal support and impact the “Ruff-Fischer Guidelines” have on an award of spousal support. Greg also went to great lengths to explain how, due to the spousal support tax deduction, the payor of spousal support will pay less than the agreed upon amount, while the recipient will receive less than the agreed upon amount.

Following Greg’s article, Benjamin authored an article discussing alimony in Minnesota titled Will Spousal Maintenance (Alimony) Be Awarded In My Minnesota Divorce Case? If So, What Amount? While Benjamin’s article doesn’t specifically discuss the tax deductions associated with alimony, his article does contain a detailed analysis of the issue of spousal maintenance in Minnesota.

The Specifics of the GOP Tax Reform Bill

The GOP Tax Reform Bill passed through Congress on December 20, 2017. President Trump signed the GOP Tax Reform Bill shortly before Christmas. It is undisputed that the GOP Tax Reform Bill is substantial and complex, changing tax brackets, deductions, and withholdings.

Perhaps the biggest impact for us family law attorneys is the elimination of the spousal support tax deduction. In 2015, approximately 600,000 Americans claimed a deduction for spousal support they paid. At the present time, spousal support payments are tax deductible by the payor and must be claimed like regular income by the recipient. For illustrative purposes, look at the example contained in Greg’s prior article. The payor in Greg’s article would pay $6,720 less than the amount agreed upon in the divorce judgment, due to the spousal support tax deduction. While on paper the recipient should receive $24,000 per year in spousal support, he or she will only receive $20,400 because he or she will have to claim it as normal income.

This will no longer be the case after December 31, 2018. Divorces finalized after December 31, 2018 will not be afforded this benefit, as the spousal support tax deduction will no longer exist. This means that if the payor agrees to pay his ex-spouse $1,000 per month, he will pay her $1,000 per month, and she will receive $1,000 per month. Those divorced prior to December 31, 2018 can breathe a sigh of relief, as the elimination of the tax deduction for spousal support payments is not retroactive. This means that if you are divorced prior to December 31, 2018, but have to pay spousal support after December 31, 2018, you can continue to claim those payments as deductions on your taxes and the recipient will need to claim them as regular income.

The Impact

One can predict that the elimination of the spousal support tax deduction will have a significant effect on divorces involving the payment of spousal support. It may decrease parties’ ability to reach an agreement and increase the cost of litigation if a spouse continues to seek an award of spousal support. Parties may reach an impasse on this issue more quickly, especially since the payor will likely be less willing to agree to pay spousal support if there are no tax benefits. A recipient may persist in his or her request because he or she will not have to claim it as normal income.

While it’s clear how this provision of the GOP Tax Reform Bill will affect divorces, the impact of the GOP Tax Reform Bill affecting more than just divorces is not so clear. For instance,how will the elimination of the spousal support tax deduction affect spousal support provisions contained in premarital or postnuptial agreements drafted prior to December 31, 2018? In premarital and postnuptial agreements it is typical that parties outline what spousal support looks like if the parties divorce. Up until now these provisions have typically been drafted assuming the spousal support tax deduction is applicable. The question is how will these provisions be analyzed if the parties divorce after December 31, 2018?

Conclusion

The decision as to whether or not to pay spousal support to your ex-spouse is a complicated one, and should not be taken lightly and can have significant tax consequences. Any of the three experienced family law attorneys here at SW&L are happy to discuss this issue with you. You can reach the family law team at 701-297-2890. Or you can email us at: info@swlattorneys.com.

The information contained in this article and on this website is for informational purposes only and not for the purpose of providing legal advice.