Linda Hoffmann

The new federal tax plan adopted in December 2017 eliminates the tax deduction for spousal support payments (commonly called alimony). This change may make negotiating a settlement more difficult and expensive and place a real burden on low-moderate income couples.

In Ohio, spousal support is an award of a payment in a divorce or dissolution that is separate from child support. The payment is made to a former spouse who earns less money.

Under prior law, spousal support was tax free for the payer and taxed like regular income for the recipient. In theory, this shifted income to the recipient’s lower tax bracket, keeping more money in the family and giving less money to Uncle Sam. The IRS reports about 600,000 Americans claimed an alimony deduction on their 2015 tax returns.

The new law repeals the tax deduction payers and affects divorces or dissolutions granted by a court after December 31, 2018. It also affects future changes in payments for older orders before this date. Without the deduction, there's less money to go around as the higher wage earner who is generally in a much higher tax bracket will be sending more to the IRS when this is included in the total earnings instead of the amount being taxed at the recipient’s generally lower tax bracket.

The loss of the deduction to the payer may also complicate how child support is calculated. The loss of the deduction may be more difficult on lower-income couples. Wealthy people can usually afford higher taxes on alimony payments, but for those with limited means, the additional taxes may now make a big difference in their lifestyle and quality of life including ability to meet monthly utility, car, insurance and other expenses.

Prenuptial agreements may also be affected. In the past, the assumption was that these payments would be taxable to receiver and deductible to payer. Many agreements already negotiated considered that assumption would be true in the future. If those agreements are now presented to courts in a new divorce or dissolution, will the court still enforce the agreement if the assumed tax benefit/consequence no longer exists?

Your local experienced divorce lawyer should be consulted if you find yourself faced with this issue, especially in 2018 as the timing of any court filing and final order will need to be considered as spousal support terms are negotiated.