For divorced entered after December 31, 2018, there has been a profound change in the tax law relating to spousal support and alimony.
For divorces entered before January 1, 2019, spousal support or alimony was tax deductible on the payor’s federal tax return. The recipient of spousal support or alimony would have to claim his or her spousal support or alimony as taxable income on his or her federal tax return. This allowed the party who made more money to take a deduction at his or her higher tax bracket and the party receiving alimony to pay taxes at his or her lower tax bracket. Someone who paid $1,000 per month in alimony who had a marginal tax bracket of 25% would be able to deduct the $1,000 per month and save $250 per month in taxes. Conversely, someone who received $1,000 in alimony who had a marginal tax bracket of 25% would have to pay $250 per month in taxes.
Given that this change in the tax law is so recent, it is not yet clear what the effect will be on the amount of alimony and spousal support a court award now that it is no longer tax deductible to the payor or taxable income to the payee. It could mean that the alimony or spousal support amounts could be less than under the previous tax law. Before the change in the tax law, the person seeking alimony could argue and present evidence that the payor would get a tax break on the alimony he or she pays. This meant that the court might award higher alimony, knowing that the payor would get a tax break. Under the new law, the person seeking alimony will not be able to argue that the payor will receive a tax break and therefore should pay higher alimony.