How New Alimony Laws Impact both Spouses in Divorce
Recently approved legislation has brought changes to the tax implications of alimony payments. Will the changes affect both parties in the divorce equally? The answer is no.
For agreements entered prior to January 1, 2019, the old tax rules still apply. Under the old rules, tax alimony payments were deductions to the payer and income to the recipient. For divorces settled prior to the date of the change, future alimony payments will still be deductible for payers and taxable for recipients. Prior agreements are not subject to the new change.
President Trump’s Tax Cuts and Jobs Act of 2017 made alimony payments no longer deductible to the payer and no longer taxable to recipients. This alimony treatment mirrors the already existing treatment of child support. This change impacts only divorce agreements entered after December 31, 2018.
What does the new law mean for the payer? It means they will have less after-tax dollars available after paying alimony than they would have under the old law. See below for a simplified example assuming a flat 6% state tax and based on single filer Federal tax rates for 2018.
Federal Tax Rates – Single Filer 2018
| Fed Rate | Individuals |
| 10% | Up to $9,525 |
| 12% | $9,526 to $38,700 |
| 22% | $38,701 to $82,500 |
| 24% | $82,501 to $157,500 |
| 32% | $157,501 to $200,000 |
| 35% | $200,001 to $500,000 |
| 37% | over $500,000 |
Alimony Comparison – Receiving Spouse
| Old Law | New Law | Difference | % | |
| Total Income | $ 45,000 | $ 45,000 | $ – | 0.00% |
| Taxable Alimony Reciept | 200,000 | – | (200,000) | -100.00% |
| Taxable Income | 245,000 | 45,000 | (200,000) | -81.63% |
| Taxes (Rounded) | (74,790) | (8,350) | (66,440) | -88.84% |
| After-Tax Income | 170,210 | 36,650 | (133,560) | -78.47% |
| Non-Deductible Alimony Reciept | – | 200,000 | 200,000 | 100.00% |
| Total Cash Flow | $ 170,210 | $ 236,650 | $ 66,440 | 39.03% |
What does the new law mean for the recipient? It means they will have more after-tax dollars available after receiving alimony than they would have under the old law. See below for a simplified example assuming a flat 6% state tax and based on single filer Federal tax rates for 2018 as previously stated.
Alimony Comparison – Receiving Spouse
| Old Law | New Law | Difference | % | |
| Total Income | $ 800,000 | $ 800,000 | $ – | 0.00% |
| Deductible Alimony Payments | (200,000) | – | 200,000 | -100.00% |
| Taxable Income | 600,000 | 800,000 | 200,000 | 33.33% |
| Taxes (Rounded) | (223,690) | (309,690) | 86,000 | 38.45% |
| After-Tax Income | 376,310 | 490,310 | 114,000 | 30.29% |
| Non-Deductible Alimony Payments | – | (200,000) | (200,000) | 100.00% |
| Total Cash Flow | $ 376,310 | $ 290,310 | $ (86,000) | -22.85% |
So, what does this mean practically? If counsel is representing the party likely to pay alimony, then they would want to attempt settling the divorce prior to January 1, 2019. If counsel is representing the side receiving the alimony payment, they may want to wait, if possible, until next year to settle the divorce. For those divorces that settle in 2019 or later, recipients should expect to receive less alimony and payers should expect to pay less as the goal of alimony is to provide the recipient the ability to maintain a certain life style. It is the net after-tax cash flow to the recipient that matters; just because the new tax law changes who pays the tax on that income shouldn’t increase the net income to the recipient or the net cost to the payer.
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