The deduction that allows Payors of Alimony (and Spousal Support in Pennsylvania) to deduct those payments on their Federal Tax returns has been around for generations. Crafty Family Law attorneys used this deduction to help resolve divorce and support cases for decades. Basically, if the Payor was in the 38% Federal tax bracket and the recipient was in the 15% bracket, a $10,000 per month Alimony order only cost the Payor $ 6,200 per month ($10,000 – 38%) and the Recipient actually received $8,500 net after taxes ($10,000 – 15%).
With the lowering of the famed crystal ball in Times Square, Alimony is no longer deductible in 2019. The Tax Reform that was passed by Congress in December of 2017 contained a last minute addition that eliminated the Alimony deduction beginning on January 1, 2019.
The practical effect of this logically should be to lower Alimony awards going forward. Remember the example above, there was a $2,300 per month difference ($8,500 – $6,200) in a net payment of the Payor and the net amount received by the Recipient. Divorce Courts will presumably close this gap someplace in the middle. The end result is the Payor will pay more and the Recipient will receive less in after-tax dollars.
The elimination of the deduction is not supposed to be retroactive. So to anyone who is paying or receiving Alimony (or Spousal Support) based on an Order that was in effect as of December 31, 2018, your Alimony is still deductible by the Payor or reportable as income by the Recipient.
You ask, what if I or my spouse (ex-spouse) seek to modify a pre-2019 Order? Great Question.
The old law is supposed to apply to any modifications of Alimony (or Spousal Support) Orders that modify a pre-2019 Order unless the parties agree otherwise. But, we are talking about the IRS here and the one certainty with the IRS is there are no certainties. So, you better draft carefully and plan for a situation where the IRS may disallow the deduction on the post-2019 modification.
The lessons to take away are:
- Alimony awards should be lower in 2019 and going forward and;
- be careful modifying pre-2019 Orders.
Coming shortly: How does this affect my support payments under the Pennsylvania Support Guidelines?
Like the families we serve, matters of family law come in all shapes and sizes—and our Pennsylvania and Delaware Family Law attorneys are equipped to manage and resolve a variety of legal issues. Our attorneys cover all aspects of family law, from drafting prenuptial agreements before parties marry to negotiating divorce settlements when a marriage ends, as well as helping parents resolve child custody disputes. Learn more about our family law practice.
Lance Nelson, chair of the Firm’s family law practice, has over 25 years of experience representing clients in family law matters such as divorce, marital agreements, adoption, custody, and support.
If you have any questions about your Alimony obligation, call (610) 436-0100 or email [email protected] to arrange a meeting with a member of our family law team.