If you pay attention to the news at all, then I’m sure you know that Congress recently passed a new tax reform law. There are many sweeping changes to the tax code as a result. We’ll be hearing more about the changes and learning the effects for months to come.
One of the changes relates to the tax deductibility of alimony, or spousal maintenance as it is called in Minnesota. For years and years, spousal maintenance has been tax deductible to the payor and includible in taxable income to the payee. It was one of the black letter principles of law that was taught in law school: Spousal maintenance is tax-deductible, but child support is not. Rather, child support is paid with after-tax money.
The new law changes that. Starting with divorce decrees entered in 2019, spousal maintenance is no longer tax-deductible. Like child support, it will be paid with after-tax money.
Why is this important? The net-effect of the change is that it will reduce the collective amount of after-tax income available to the payor and payee. If spousal maintenance is an issue in your case, then the payor will almost certainly be in a higher tax bracket than the payee. For that reason, the tax benefit experienced by the payee when spousal maintenance is tax-deductible is greater than the tax hit experienced by the payee. It is almost like a way of creating income.
And, anecdotally, I can tell you that spousal maintenance payors usually are not excited about the idea of paying their ex-spouse spousal maintenance. It is one of the more difficult issues to settle in a divorce case. But, the fact that spousal maintenance was tax-deductible served as a silver lining.
Time will tell what impact the new law will have.
Contact Beyer & Simonson
If you are facing divorce and any of the divorce-related issues such as spousal maintenance, child support, child custody, property division, or domestic abuse matters, you need our experienced Minneapolis divorce attorneys to help you. Contact Beyer & Simonson in Edina, Minnesota today at (952) 303-6007.