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Tax reform adds complexity to spousal support

On behalf of Cohn Lifland Pearlman Herrmann & Knopf LLP | Aug 27, 2018 |

Under the current system, a person paying alimony deducts his or her alimony payment thereby receiving a, sometimes substantial, tax break.  The alimony recipient then has to report his or her receipt of alimony as income on their tax returns and therefore pay taxes on that amount at his or her, typically, lower tax bracket.

After the end of this year, Dec. 31, 2018, under the federal Tax Cuts and Jobs Act, any alimony settlements entered into will no longer be considered a taxable event. What that means is that a paying spouse won’t be able to deduct the payments from their taxes and recipients won’t have to report it as income on returns.  This significant change in the manner in which alimony is treated will necessarily complicate the analysis regarding the calculation of spousal support.

The warning coming from many experts is that couples considering divorce or in the process of divorce, especially where one spouse is a high income earner, have only a few more months to work out the necessary terms of settlement to take advantage of the existing tax breaks.  Once the taxability of alimony changes, the dispute over the amount of alimony paid and received becomes more complex as both spouses will examine what he or she would have paid or received under the prior analysis, which amounts may not match due to each party’s differing tax bracket.

While no one should feel pressured to rush into a divorce or finalize the terms of a settlement prematurely, it is important that you understand your rights and responsibilities.  Consult with an attorney who stays abreast of the changing law who can advise you accordingly.