Divorce is rarely easy, and changes in the federal tax laws are going to mean one facet of divorce is about to get trickier: alimony. In Texas, alimony or spousal maintenance support is either ordered by the court or entered into voluntarily. It can be one of the most contentious elements of divorce. If you are considering a divorce or your divorce is not finalized by Jan. 1, 2019, you need to know how spousal maintenance payments will change.
What is the current law?
If your divorce is final by Dec. 31, 2018, your spousal maintenance payment won't change unless you modify it. Currently, the person paying alimony deducts the payment on her or his taxes, reducing her or his income and tax bracket. The payer receives a tax break pre-2019. The person receiving alimony has to claim the payments received as income, thereby increasing her or his income. The payee pays taxes on alimony.
What is the new law?
Effective 2019, the deduction of alimony from the payer's side goes away, as do corresponding tax breaks. On the flip side, the payee no longer claims the payment as income. The new law forces the payer to ante up the taxes on the alimony rather than the payee.
What are the implications?
At face value, the change in the tax law seems to benefit the payee. If you take a closer look, however, it may be quite the opposite. One of the incentives for a person agreeing to pay spousal maintenance is the tax deduction it affords. Attorneys and courts take the tax break into account when setting the payment amount. Under the new law, there will likely be a reduction in the amount owed by the payer to account for the payer making the income tax payment rather than the payee.
Who comes out the winner in this change? Considering the increased tax burden on the payer, the payee may come out a little short under the new law versus the old. Keep this in mind when considering a final divorce settlement where spousal maintenance applies.