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Alimony tax changes will likely affect middle class couples most

On Behalf of | Aug 1, 2018 | Firm News |

Some individuals are pushing to finalize divorces before the new tax overhaul bill takes effect. For divorcement agreements created after the end of 2018, the bill eliminates the ability to take spousal support as a deduction on a tax return. For those that pay spousal support, this might add up to a significant financial hit.

Spousal support payors taxed at a higher rate

Those paying spousal support will be taxed on all their income going forward. So, even though they are supporting two people, they will be taxed at a higher individual tax rate.

New law may hurt those receiving spousal support

With the new tax rules, exes that receive spousal support will no longer have to claim it as income. This may seem like a win for spouses who make less money. However, the issue is more complex than that. According to the Lexington Herald Ledger, some attorneys are concerned that this will also negatively impact those who are seeking spousal support.

Individuals who are trying to avoid this change in tax law may be pushing their soon-to-be ex to finalize the divorce before the other spouse is ready.

It could also mean there is less money to divide between a now split family, since the divorced couple will generally be paying more taxes. Middle class couples are likely to take the greatest hit because their income is more modest, and they do not receive some of the tax breaks available to upper tax brackets. Couples where the income disparity is larger will also have a greater increase to their tax payments.

The spouse paying spousal support may also offer a lower spousal support payment to compensate for this lost tax money.

Government will profit

With this change to the tax law, Business Insider states the federal government will collect $8.3 million more from divorced spouses during the next 10 years.