When the government changed the tax code, divorce filings increased in 2018 due to the implications of the changes. Lawmakers changed the code to remove the tax incentive for those paying alimony.
How does one change in the tax law have such an impact on divorce settlements? To get an idea of what it may mean for you, take a look at what the law was like before Jan. 1, 2019 and how it exists now. Comparing the two may help you understand how divorce negotiations may differ drastically from what they were just a year ago.
The old code
Under the prior code, the spouse paying spousal support took a tax break on payments because it reduced income. A reduction in income may put the payer in a lower tax bracket. The recipient of the payments had to count it as income and pay the taxes. For some receiving the support, it may push them into a higher tax bracket. However, spousal support is necessary in many cases, as the recipient may have a difficult time without it. Therefore, having to pay taxes was not as big of an issue.
All divorces finalized prior to Jan. 1, 2019, became grandfathered into this tax situation.
The 2019 changes in the code
As of Jan. 1, spousal support is no longer taxable on either end. For the payer, this means it stays a part of the calculation of income, placing him or her into a higher bracket. The amount of money the payer now has to spend in taxes throws a wrench in negotiations.
Likewise, the change may seem to benefit the recipient since it is no longer taxable as income. However, with more of a reluctance to settle spousal support payments at a higher rate, it may wind up costing the recipient more in the short and long run.