On December 22nd, President Trump signed the Tax Cuts and Jobs Act of 2017 into law and introduced sweeping changes to the Internal Revenue Code. One of the more stunning modifications has to do with the tax treatment of alimony and spousal support payments. Once treated as a tax deduction to the payer and taxable income to the payee, Congress has transformed alimony into a dead-weight payment that is treated identically to child support.
Former 26 U.S.C. §71 defined “alimony or separate maintenance payment” to mean any payment in cash received by (or on behalf of) a spouse under a divorce or separation instrument. The payor spouse was entitled to deduct the amount of these alimony and separate maintenance payments from taxable income like any other tax deduction. The payee spouse had to include said amounts received in his or her taxable income as if it was earned. This adjustment to income was the cloud with the silver lining to make this undesirable outcome to divorce more tolerable. For example, an ex-husband who earns $80,000.00 per year makes alimony payments of $20,000.00 in 2017 to his ex-wife who earns $20,000.00 per year in wages. The ex-husband may deduct these amounts from his gross income, leaving taxable income of $60,000.00 per year, and the ex-wife includes the payments with her wages for taxable income of $40,000.00. A reduced taxable income meant that the payor spouse could be in a lower tax bracket and reduce his or her overall tax liability.
Newly enacted 26 U.S.C. §11051 explicitly repeals Section 71 of the Internal Revenue Code. This means that the alimony or separate maintenance payment is no longer deductible to the payor and is no longer includible to the payee for ANY divorce or separate maintenance instrument executed after December 31st, 2018. The spousal support payment is fully taxable to the payer spouse. The payee spouse receives the alimony/separate maintenance payment tax-free as if it was child support. Furthermore, any divorce or separation instrument prior to December 31st, 2018 requiring alimony or separate maintenance payments that are later modified by the family court may be affected by the Tax Cuts and Jobs Act of 2017 and lose their tax-free status.
Why eliminate the alimony deduction? According to the Internal Revenue Service, almost 600,000 taxpayers in 2015 claimed the alimony deduction for a total exceeding $12 billion. Eliminating this tax benefit will increase revenue to the federal government since the alimony will be taxed to the payor spouse who is likely in a higher tax bracket. For example, in 2018, a husband who earns $180,000.00 per year is in the 32% tax bracket and will pay higher taxes on alimony payments as opposed to the ex-wife’s income who only earns $30,000.00 per year at the 12% tax bracket. While Congress lowered tax rates on corporations and high-income individuals, the difference was made up in a sneaky attack on spousal support awards.
How will this affect Michigan residents? Ex-spouses who are already making alimony payments under an existing judgment may continue to use the pre-Act deduction going forward and won’t be affected unless the payments are modified by further court order. However, family law practitioners predict a modest increase in divorce filings in 2018, especially in higher asset situations, so that the tax deduction can still be claimed by the payor spouse. The final judgment must be entered on or before December 31st, 2018. Michigan law generally requires a waiting period of two months after filing to complete a divorce if there are no minor children. However, this waiting period increases to SIX MONTHS if there are minor children. Spouses who have been contemplating divorce but are still unsure may have to act quickly to avoid adverse federal tax consequences.
If you or a loved one are going through divorce and need legal representation, do not hesitate to contact the experienced family law attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.