For over 70 years, Americans paying spousal support have received significant tax breaks, especially in cases involving a large wage gap between former spouses. This break is coming to an end in 2019. A recently developed law will remove tax breaks on spousal support payments that are finalized after December 31, 2018. Both individuals paying and receiving support will be affected.
A race to finalize agreements
Under the current law, individuals paying spousal support can deduct the payments from their income. Payments are also counted as income for individuals receiving spousal support. Starting in 2019, spousal support, also known as alimony, will no longer be deductible.
Many high-asset couples are racing to finalize divorce before the law takes effect. If a spousal support agreement is finalized by 2019, then the old tax law can still be applied. This tax break can make a big difference for end-of-year income in situations where one spouse earns significantly more than the other. Some agreements may go on for decades, totaling a significant sum of money. It is estimated that the new law will bring in over $7 billion in additional revenue to the federal reserve over the course of 10 years.
How will this law affect the outcome of agreements in the future?
Under current circumstances, high-wage earners may feel more comfortable agreeing to large spousal support payments because the amount is deducted from their income at the end of the year. Spousal support negotiations in the future may become more contentious as high-income earners will want to make up for the lost tax breaks. This can negatively affect lower-income spouses and stay-at-home parents who may end up receiving less financial support.
If you are concerned that this change in the law will negatively affect your financial well-being, then it is best to speak with an experienced divorce attorney. Workarounds may be available, such as replacing alimony with other assets in agreements.