January is 'divorce month,' and this year brings new tax rules for couples who split up

couple thinking fightingGleb Leonov/Sterlka Institute/Flickr

  • The Tax Cuts and Jobs Act enacted new tax rules regarding spousal support payments, also known as alimony.
  • In divorces finalized after January 1, 2019, the person paying spousal support can no longer deduct the amount from their taxes.
  • For recipients, spousal support payments are no longer considered taxable income.
  • The result is an increased tax burden on the spouse paying alimony, and ultimately, more money for the government.

January is unofficially known as "divorce month," and 2019 brings new tax rules for couples who separate this year.

The GOP tax law was passed in December 2017, but it has taken some time for certain laws to come into play. One such law changes the way spousal support, or alimony, payments are taxed and deducted.

Spousal support is an allowance paid from the higher-earning spouse to the lower-earning spouse during a legal separation and/or divorce. The amount and duration of the payments depends on a variety of factors, including the length of the marriage, age of spouses, and degrees earned.

"Under previous law, the payer can deduct the alimony and the recipient is taxed on it as income," Alvina Lo, chief wealth strategist at Wilmington Trust, explained to Business Insider. "Therefore, typically, the wealthier spouse (who pays the alimony) receives a tax benefit via the deduction, and the less wealthy spouse (who receives the alimony) pays the income tax at a lower tax bracket."

Read more: Here's how the new US tax brackets for 2019 affect every American taxpayer

Under the new law, which affects divorces settled on January 1, 2019, and beyond, the wealthier spouse - which Lo notes is typically the husband - is responsible for paying taxes on the payments.

There's an increased tax burden on the spouse paying alimony - and more money for the government

Lo offered the following example: A husband and stay-at-home wife earn a total income of $500,000. Upon divorce, the husband is to pay his former wife $150,000 in support payment.

Under the old law, the husband would get a deduction for $150,000 (husband's tax bracket rate is 35%) and the wife pays income tax on $150,000 at 24% tax bracket rate.

Under the new law, the husband pays income tax on $150,000 (his tax bracket rate is 35%). There is no deduction and the wife does not pay income tax on $150,000.

2019 tax brackets table (1)Shayanne Gal/Business Insider

The result is an increased tax burden on the husband and a lessened tax burden on the wife, Lo said. "The government gets more because the tax on $150,000 is borne by the husband at a higher rate," she added.

For divorces finalized on or before December 31, these new tax rules do not apply.

The new SALT deduction limit may affect divorcing couples

The new tax treatment of spousal support payments isn't the only part of tax reform affecting divorcing couples, Lo said.

"[T]he reduction of the SALT deduction is making it more difficult for the ex-spouse to stay in the marital home," she said. The GOP tax law capped the amount of state and local income taxes (SALT) a person could deduct at $10,000, which disproportionately affects those in high income-tax states like California and New York.

"Prior to the tax law change, someone with a modest spousal support payment, and perhaps a lump sum payment that generates investment income, could stay in a sizable marital home if she (and it's typically the wife in cases like this) can also deduct a significant amount in terms of SALT deduction," Lo said. "With SALT deduction limited to $10,000, the overall tax burden is higher and it is becoming more difficult to stay in the marital home."

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