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New tax code strips 'silver lining' from spousal maintenance

Few would argue that divorce is a simple process. Even within the context of an amicable divorce, certain issues can arise that may threaten to derail cooperative tendencies that the parties might have had at the start.

Most readers are likely aware by now about the tax code overhaul that Congress was able to enact. It was signed into law late last year, but one provision of the law doesn't take effect until January 2019. In the wake of the law's passage and in advance of that one provision coming, many family law observers are raising warnings about the implications for divorcing couples.

What's roiling the pot is a change in how spousal support will be handled from a tax perspective. Under the existing regime, individuals paying spousal maintenance, or alimony, can claim a deduction on their income taxes. The receiver of the payments is required to pay tax on what they receive.

Some consider this something of a silver lining in what is often an otherwise negative situation. It is something of a win-win because the deduction makes it easier for the payer to accept paying the receiver more for a longer period of time. At the same time, the recipient, usually earning less, pays less in taxes than might otherwise be paid. The U.S. government loses because it doesn't get as much in taxes as it could.

Indeed, advocates of the change in Congress argue that one benefit of the change is that it ends a tax scheme that serves as a financial incentive for divorce.

The exact impact the change is going to have on divorce is difficult to gauge, but many legal observers predict that with no tax deduction available, paying spouses – especially those in the high-income bracket – will be more inclined to litigate than collaborate when it comes to alimony.

We'll be watching to see.

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