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As I am sure everyone knows by now, new tax legislation was enacted on December 21, 2017. The new legislation will impact not only couples to be divorced in the future but it will also impact couples that are already divorced and still paying alimony.
The amount of alimony is determined based on an after-tax cash split between husband and wife. For example, in a situation with spouse 1 and spouse 2 making $100,000 and $50,000 respectively, with no children, spouse 1 would have after-tax cash of approximately $71,000 and spouse 2 would have after-cash of approximately $39,000 (a 64/36 after-tax cash split between spouses). Ohio courts would generally award alimony based on some percentage of an after-tax cash split. In this example, alimony of $14,650 per year would be awarded to spouse 2 to reach a 55/45 after-tax cash split.
However, with the new tax legislation, the tax rates have changed and this will impact the after-tax cash split between spouses. Using the same example as above, spousal support would decrease to $10,500 per year to reach the same 55/45 split. Based on these changes, there has been much discussion about whether, or if, prior support orders can be modified based on these changes alone.
In addition to impacting already divorced couples, the new tax legislation has changed the rules of how alimony payments will be treated for tax purposes. For couples divorced prior to December 31, 2018, the payer receives a deduction for alimony payments and the recipient includes them as regular income. Generally, the recipient of alimony is in a lower tax bracket. Taxing the alimony to the individual in the lower tax bracket keeps more money in the family unit. The new legislation, however, does the opposite for divorces starting January 1, 2019. The payer can no longer deduct the alimony payment and the recipient no longer has to report the alimony as income and pay tax on it.
The change in the tax law means that alimony, generally, is now taxed in a higher tax bracket leaving less money for the family unit. As can be seen in the table below, using the same example as above, the new legislation increases the total tax paid by the family unit by just over $2,600.
As if divorce wasn’t complicated enough, the new tax legislation has created wrinkles to iron out when attempting to settle divorce cases.