When couples get divorced in Los Angeles, it is not uncommon for the spouse who earns less money to ask for alimony. Alimony, which is often referred to as spousal support, is a form of financial assistance that is paid by one spouse to another. Many times, spouses do not have equal earning capacities. In some cases, one spouse may not even have an income. When the couple gets divorced, alimony payments help to keep the spouse with less earning power financially stable. Spouses who are required to pay alimony generally don’t mind because they are not taxed on the amounts they provide to their former spouse.
Unfortunately, the alimony deduction for federal income tax purposes may soon be a thing of the past. The GOP tax law eliminates the incredibly popular deduction. Under the new law, spouses who get divorced in the future and pay alimony will see a sharp rise in their yearly tax bill. This could be disastrous for divorce negotiations. If you are thinking about getting a divorce is important to understand the implications that the GOP tax law could have on your split. Find out more in our latest article or call Steven Fernandez, a divorce lawyer in Los Angeles with over 28 years experience.
How is Alimony Currently Taxed?
Under current federal income tax law, spouses who pay alimony are entitled to deduct the amounts they pay to their former spouse. This reduces the burden that is placed on the payer come tax season by reducing his or her taxable income. For example, imagine that Bob earned $225,000 last year. Under the current law, this puts him in the 33% tax bracket. However, he paid $50,000 to his ex-wife, Jane, last year. Since the current law allows an alimony deduction, Bob’s taxable income would be reduced to $175,000. This would actually drop him into a lower tax bracket, and he would have that $175,000 taxed at 28%. This is great news for Bob. Instead of owing $74,250 in taxes he would only owe $49,000.
What happens to Jane, who received $50,000 in alimony last year? Jane will be taxed on the alimony she received. However, since Jane is receiving alimony, she is likely earning a lot less money than Bob. Let’s say that Jane has no other income of her own because she is a full-time mother. Her income for last year would be $50,000. Under the current tax law, this would put her in the 25% tax bracket. Her tax liability (without considering the Earned Income Tax Credit, Child Tax Credit, and other beneficial tax incentive programs which would reduce her taxable income by a significant margin) would be $12,500.
Under the current system, the alimony deduction allows families to keep more money in their pockets and pay less to the government in federal taxes.
How Will Alimony Be Taxed Under the GOP Tax Law?
The GOP law eliminates the alimony deduction for all couples who divorce on or after January 1, 2019. How will this affect couples like Bob and Jane? Bob had income of $225,000 last year and paid $50,000 to Jane in spousal support. Under the new GOP tax law, Bob would not be entitled to deduct that $50,000 and reduce his taxable income. This means that he would be required to pay Jane $50,000 and pay tax on that money. The new law would also bump Bob up to a higher tax bracket. So, instead of being taxed on $175,000 of income at 28% (paying $49,000), Bob would be taxed on $225,000 at 35% (paying $78,750).
Jane would still be in the same situation, tax-wise, if she were to receive $50,000 in spousal support. However, since Bob would be losing a huge deduction he may be reluctant to agree to pay alimony, at all. If he were forced by the court to pay alimony he would likely fight to pay as little as possible since there is no longer an incentive for him to give up his money. He will still be taxed on his income in-full, so he will probably want to save that for himself. Additional fights over alimony and divorce settlements would be costly. Spouses would likely be forced to drag out the divorce process and spend more money on attorney’s fees and court costs.
Consult an Experienced Los Angeles Family Law Attorney
If you think that a divorce may be in your future you should speak with an experienced Los Angeles divorce attorney. At Fernandez & Karney, our legal team understands that this is a difficult and confusing time in your life. We will outline the process of getting a divorce and explain the potential tax consequences of your decision. We will not only explain the tax ramifications under the current federal tax system, but project what any proposed changes in the law may have on a future divorce. Having this knowledge can help you make informed, smart decisions. Call today to set up a free consultation with our experienced Los Angeles divorce attorneys.