Many people when they hear about changes in the tax code get nervous. How much more will I owe? How will this change my taxes? Will I actually benefit?) The 2017 Tax Act was a fairly large overhaul of the tax system especially for some of clients. Here is an overview of the changes (consult your tax professionals of course!):

Spousal Maintenance:

Spousal maintenance or alimony is money paid by a former spouse (either husband or wife) to their former spouse after a divorce. Since 1942[1], the former spouse paying the spousal maintenance deducted that payment from their income for tax purposes. The person receiving the spousal maintenance had to claim the payments as income.

The tax deduction was a huge benefit. To understand why, it is best illustrated by example. Assume that Pat and Perry were married and in their divorce, Pat agreed to pay Perry $100,000 per year in spousal maintenance. Pat has $500,000 of taxable income per year and would be (but for the spousal maintenance deduction) in the 39% tax bracket. Under the current law, Pat would not pay taxes on the spousal maintenance (which would have been $39,000) and would be placed in a lower tax bracket because of the deduction. Perry would pay taxes on the $100,000 in maintenance received, but in all likelihood, would be in a much lower tax bracket. (Assume for purposes of this example, that Perry pays taxes at 28% which would mean paying $28,000 on the spousal maintenance award which means $11,000 less in taxes being paid.)

The new tax law changes who pays taxes on a spousal maintenance award. Under the new law, the person paying the spousal maintenance is no longer allowed to deduct it and would pay taxes on it based on their tax bracket. The person receiving the spousal maintenance pays no taxes on it. In other words, it shifts tax liability from the person receiving the maintenance to the person paying the maintenance. Hence, in the above example, the maintenance payment would now cost Pat $100,000 plus $39,000 in tax liability and would mean that $11,000 more would be paid in taxes. Quite possibly, the increased cost (keeping in account the tax liability) of spousal maintenance may reduce awards or alter property settlements to replace or supplement reduced spousal maintenance awards. It is important to note that the law will have no effect on spousal maintenance awards made prior to 2019 and will only apply to awards starting in 2019.

Personal Exemption:

Previously, taxpayers received a standard deduction and also an exemption (for themselves and for their dependents). For tax year 2018, the standard deduction jumps significantly but the personal exemptions are suspended (meaning you don’t get to use them). When a couple separates or divorces, the exemption often rotates between the parents. This tax benefit will not be available to families starting in tax year 2018.

As divorce professionals, we think it is important to understand the full implication of a divorce on your family. If you are facing a divorce or custody action, please contact the Rybicka Law Office, PLLC at 612.573.3690 to schedule a free initial consultation.

[1] This change occurred due to the lack of uniformity in the tax law relating to spousal maintenance payments and in response to a US Supreme Court Case. For all you law/tax nerds out there, here is the case. If you want to take it a little further this is a highly informative 1943 law review article on the topic.