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How the Tax Cuts and Jobs Act May Affect Alimony

How the Tax Cuts and Jobs Act May Affect Alimony

Alimony in Oklahoma is based upon one party’s need, and the other party’s ability to pay. That’s scant guidance when addressing any divorce in which alimony is at issue, and the topic has long proved difficult to navigate for litigants and attorneys alike. The issue became more complicated with the passage of the Tax Cuts and Jobs Act in December 2017.

What Changed?

If support alimony is an issue in your case, you would do well to finalize your divorce before the end of 2018. Alimony is already difficult to obtain in many cases, but divorce attorneys who already find themselves attempting to squeeze blood from a turnip are going to find the turnip getting smaller in 2019 thanks to the Tax Cuts and Jobs Act.

The “Trump Tax Plan” eliminates the 75-year-old tax deduction available to alimony payers, which used to make payments easier to stomach. To summarize, the changes that take effect beginning January 1, 2019: (1) there is no longer a deduction available to the payer of alimony and (2) the recipient of alimony payments can no longer report alimony as income for tax purposes.

How Does It Work?

It is commonly thought that the payer’s tax deduction system that’s been in place for 75 years provided more money overall to allocate among the divorcing spouses, making the separation easier to handle financially.

For example, imagine a higher-earning husband currently pays and deducts $30,000 a year in alimony. The husband's income is federally taxed at 33%, so the deduction saves him $9,900. The lower-earning wife owes taxes on the alimony at a 15% rate, paying $4,500 instead of the $9,900 that would be due at the husband's rate. The two have saved $5,400 between them, and the husband can better handle the payments because of the tax benefit available to him. The new law could take more money out of the available pot by taxing the money at a higher tax rate as opposed to the lower tax rate of the recipient spouse.

Who May Be Impacted?

Women receive 98% of all alimony payments according to the U.S. Census Bureau, therefore, the negative impact of this change in the law is likely to be felt more acutely by women because, by some accounts, it could reduce alimony payments by 10% to 15%. However, the total impact is yet to be seen.

The practical implication of this change in the law is that parties in which support alimony is an issue should consider the tax implications of waiting until 2019 to settle or finalize their divorce. It could make a significant impact on the amount of alimony to be paid to the recipient and may be more appealing for both parties to finalize their divorce at a higher support alimony amount prior to 2019. In many cases, the payer of the alimony may be willing to shell out more money in order to receive the tax benefit of the deduction, and although the amount would be taxable to the recipient, the net impact could be more beneficial to the recipient. The timing of the settlement has an impact on the parties—bottom line.

What if I Already Have an Alimony Award?

If you have already entered into a divorce settlement and decree which provides for alimony to be paid or received, the change in the law does not apply to you. However, you should be aware that if you ask to modify the award, it is likely that the change in the law would apply to the modified order. You should always consult with a qualified family law attorney prior to initiating a modification of an alimony award, and with the change in the law, such consolation becomes even more important.

These changes in the law certainly impact divorce negotiations in Oklahoma. With little statutory guidance as to how alimony should be awarded, spousal support has long been a sticking point in divorce negotiations, and the law change does not help that fact. The best step for any party facing divorce is to seek competent family law counsel. The Oklahoma City family law attorneys at Smith Simmons, PLLC are prepared to assist you with any questions you may have regarding divorce, alimony, or child custody.

Call (855) 973-8877 or contact us online today.

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