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New tax law changes taxation of spousal support payments

The tax law signed by President Trump just before Christmas will affect many aspects of American life, including the awarding of alimony in divorce cases. The length and complexity of the law will occupy lawyers and accountants for months as they try to come to grips with the law's meaning and implications. The change in the tax treatment of spousal support is simple to state, but the long term ramifications are not clear.

Under current law, alimony can be deducted by the ex-spouse who pays it, and the receiving spouse must pay income tax on alimony payments. The new law reverses the situation: in any divorce action started after December 31, 2018, the paying ex-spouse can no longer deduct alimony payments, and the receiving ex-spouse must no longer pay taxes on alimony.

Critics of the change say that the elimination of the alimony deduction will eliminate an incentive for the higher-earning ex-spouse to pay more alimony. Instead, the absence of the deduction will make alimony payments more expensive and, thus, reduce the amount of alimony that one divorcing spouse may be willing to pay to the other. Also, some pre-nuptial agreements contain provisions that assume the continuance of the existing law. The lawmakers who supported the change say that alimony should be treated like child support (which is neither deductible to the paying ex-spouse nor taxable to the receiving ex-spouse) without explaining why.

Most matrimonial attorneys are critical of the change, questioning both its effect and its supposed rationale. Anyone who is contemplating beginning a divorce proceeding or who is already involved in one may wish to ask their attorney to provide a complete evaluation of the effect of the new tax law on all payments that may be required by the divorce decree.

Source: The Sacramento Bee, "Exes and taxes: How the tax overhaul will alter alimony," Jennifer Peltz, Dec. 22, 2017

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