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Understanding the tax consequences of spousal support

| Dec 21, 2020 | Spousal Support |

In January 2019, changes to federal tax rules affected the taxation of spousal support. Prior to these changes, the payor of spousal support could write off their obligation from their taxable income. The recipient of spousal support, in this case, would count it as part of their taxable income. With the changes to federal tax rules, the opposite is now true for all divorces finalized after December 31, 2018.

If you are eligible for spousal support as part of your divorce settlement, you may think that the changes to federal tax rules will work in your favor. In truth, they will likely hurt both you and your spouse.

How changes to tax rules affect spousal support payments

Before federal tax rules changed, it might have seemed unfair that spousal support payors could deduct their obligation from their income. Yet, this arrangement freed up more of payors’ incomes to provide support with. With the changes to federal tax rules, the consequences are twofold. Payors of spousal support – who can no longer deduct their payments from their taxable income – will face a greater tax burden than before. As a result, recipients of spousal support may receive smaller payments than they would have under the former rules.

How changes to tax rules could affect your divorce

Based on the changes to federal tax rules, you may worry that you will not receive the amount of spousal support you need to maintain the lifestyle you had during your marriage. In this case, you and your spouse may want to consider alternatives to a traditional spousal support arrangement. For instance, your spouse could provide you with a lump-sum payment equal to the value of spousal support you would receive. Or, you two could work out a property distribution agreement where your spouse pays you a certain amount of money over time. Since the transfer of property incident to divorce is usually tax-free, this arrangement could provide a more tax-friendly alternative to the traditional spousal support system. The solution that is appropriate for you, though, will depend on your marital and individual financial circumstances.

The changes to federal tax rules have far-reaching consequences for both payors and recipients of spousal support. Yet, you have ways to mitigate their impact during your divorce. A family law attorney can help you figure out an arrangement that makes sense for your situation.