Alimony payments mandated by divorce agreements could lose their beneficial tax treatment.
The Tax Cuts and Jobs Act, unveiled on Thursday, includes a provision to kill the deduction that taxpayers get for making such payments to an ex-spouse. Although it’s just one of the many tax breaks eliminated under the legislation, experts say it will end up most hurting the person receiving the money.
“Alimony payers won’t be able to afford to give as much because they’ll have to give it to Uncle Sam instead,” said Nancy Hetrick, a certified divorce financial analyst and senior advisor at Better Money Decisions in Phoenix, Arizona. “There will be less money to go around to support the two households.”
If the deduction disappears, it would affect divorce agreements — where the amount and duration of alimony is codified — entered into after 2017. Child support, which is separate from alimony, already offers no deduction.
Alimony, also known as spousal support, is often part of divorce agreements when there’s a big discrepancy in earnings between the two parties and the marriage has endured for more than a few years.
In 2015, according to the data from the Internal Revenue Service, an estimated 598,888 taxpayers claimed the alimony deduction on their Form 1040, for a total of more than $12.3 billion.
However, the deduction has been a trouble spot for the IRS.
Under current law, the person paying the alimony deducts the amount and the recipient claims it as income and pays taxes on it. A 2014 Treasury report found a large discrepancy in those amounts.
More than a half-million taxpayers claimed alimony deductions totaling more than $10 billion in 2010, according to the report. Yet on the other side, recipients’ reported alimony income was $2.3 billion less.
The new tax legislation essentially would shift much of the taxation from the recipient to the alimony payer.
“Due to the disparity in tax rates that exist in these cases, this would have a negative effect on the payee. That’s the bottom line,” said Malcolm Taub, co-chair of Davidoff Hutcher & Citron’s Divorce & Family Law Group in New York.
Because the ex-spouse receiving the alimony typically is in a lower tax bracket, the amount of tax paid by the recipients — the majority of which are women — on the spousal support is less. And it’s something that courts, attorneys and divorce planners take into consideration when divvying up assets.
For illustrative purposes: Say the ex-husband is paying $3,000 in monthly alimony and is taxed at 33 percent. In effect, the deduction at tax time reduces each of those payments to $2,000.
On the receiving end, say the ex-wife is in the 15 percent bracket. The $3,000 she receives is reduced by $450, which goes to taxes, leaving her with $2,550.
Under the proposed change, providing the ex-wife with the same level of support would cost the ex-husband $2,550 instead of $2,000.
“I don’t think courts could award the same amount, given that it wouldn’t be deductible,” Taub said. “There’s only a limited amount of dollars in the pot.”
Types of Alimony Available in Florida
Florida law provides for five different types of alimony: temporary, bridge-the-gap, rehabilitative, durational, and permanent. A judge may award these different types of alimony in any combination that seems fair under the circumstances. Alimony can consist of periodic payments from one spouse to the other, or less commonly, a single lump-sum payment. Spouses can always agree between themselves on different terms and conditions of alimony, including giving up alimony enirely, usually in exchange for some other valuable type of property.
Courts often award temporary alimony—also known as alimony “pendente lite,” meaning while the divorce is pending, when one spouse requires financial support during the divorce process. This type of award automatically ends once the divorce becomes final.
Bridge-the-gap alimony begins after the divorce is final but is very short term, with a maximum duration of two years. The purpose is to help the recipient spouse meet legitimate and identifiable short term needs—for example, bridge-the-gap alimony might provide living expenses while the recipient spouse is waiting for a house to sell, or while the recipient spouse is completing a retraining or educational program to allow for improved employment prospects.
Rehabilitative alimony has the specific purpose of assisting the recipient in acquiring education or training necessary for appropriate employment. A spouse requesting rehabilitative alimony must submit a plan outlining the amount of money and time required to complete the plan.
A court might award durational alimony if other types of alimony are insufficient to meet a spouse’s needs. The maximum term of durational alimony is the length of the marriage–in other words, if you were married for ten years, you can’t receive durational alimony for any longer than that.
If the recipient spouse’s economic need is likely to be permanent, an alimony award may be permanent as well–but a judge awarding permanent alimony must always state the reasons that another form of alimony would not be fair and reasonable under the facts of the case. The purpose of permanent alimony is to provide for the financial needs of a spouse who lacks the ability to become self-supporting, at a standard of living as close as possible to the marital standard.
Factors in Need and Ability to Pay
The court begins making decisions on a request for alimony by considering the facts of the case to determine whether the spouse requesting alimony meets the standard to show the alimony is necessary. If there’s a need for alimony, the court has to also determinate whether the other spouse has the ability to pay. Unless there are some kind of exceptional circumstances, a court won’t award alimony if it would leave the paying spouse with significantly less net income than the recipient.
A judge who finds both need and ability to pay next must consider all relevant factors in deciding what type of alimony to award and for how long. Florida law says that these factors include:
the financial resources of the spouse seeking maintenance, including separate property and any award of marital property
all sources of income, including investment income, available to either spouse
each spouse’s earning capacity, educational history, vocational skills, and employability
any time and expense required by the spouse seeking maintenance to obtain education and training for appropriate employment
the marital standard of living
the length of the marriage
each spouse’s age and physical and emotional condition
each spouse’s contribution to the marriage, including homemaking, child care, education, and helping the other spouse build a career
any tax consequences of the alimony award, and
the responsibilities each spouse will have for any minor children they have in common.
A court may also consider whether either spouse committed adultery during the marriage, and under what circumstances. Courts are most likely to take adultery into account when one spouse’s affair caused the other financial harm. For example, if one spouse bought lavish gifts for a paramour using marital funds, the court might factor that into the alimony award.
Florida law applies certain presumptions with regard to length of marriage and eligibility for permanent alimony. Following a marriage of at least 17 years, a judge may award permanent alimony if such an award is appropriate in light of the above factors. After a marriage of between 7 and 17 years, there must be clear and convincing evidence of appropriateness to justify the award. After a marriage of less than 7 years, permanent alimony is appropriate only in exceptional circumstances. A marriage lasts until the spouses actually file for dissolution, not when they informally separate or stop living together.
Modification or Termination
Unless the spouses have made a specific written agreement about when alimony ends or under what circumstances it can be modified, when and how an alimony award can be modified depends on the type of alimony.
A bridge-the-gap award is not modifiable under any circumstances.
A court might modify rehabilitative alimony if the recipient fails to comply with the rehabilitative plan or completes the plan early.
Rehabilitative alimony, durational alimony, and permanent alimony are all modifiable if there has been a substantial change in financial circumstances for either spouse; however, except in extraordinary circumstances, durational alimony can only be modified in amount, not in duration, and even in exceptional circumstances the duration can never exceed the length of the marriage.
Both durational and permanent alimony end automatically if the recipient remarries or if either spouse dies. A court can also modify or terminate an award of permanent alimony if the recipient lives with an unrelated person in a “supportive relationship.” The spouse asking for a modification on this basis must prove the supportive nature of a relationship. The court will find consider the following:â��
the extent to which the two people in question have held themselves out as a married couple—for example by using the same last name, using a common mailing address, referring to each other as “my husband” or “my wife”
the length of time they have lived together at a permanent address
the extent to which they have pooled assets and income, or otherwise exhibited financial interdependence
the extent of mutual support between them, including support for each other’s children, regardless of legal obligation
performance of valuable services for each other, or for each other’s company or employer
whether the two have worked together to create or enhance anything of value
whether they have purchased property together, and
evidence that the two have either an express or implied agreement regarding property sharing or support.