2018 Tax Changes Effect on DivorceThe new Tax Reform and Job Act of 2018 contains a number of provisions that will affect those individuals getting a divorce or dissolution in 2018 and thereafter. In Ohio, if you've been in a marriage for 10 years or longer and there is a significant difference in the income of the spouses, then usually alimony will come into play (in Ohio alimony is called "spousal support").
Section 11051 of the Tax Reform and Jobs Act of 2018 eliminates the deduction for alimony payments and repeals the inclusion of alimony payments as gross income for the receiving ex-spouse (the payee spouse). This section takes effect on all divorce or separation instruments executed after December 31, 2018.
Until December 31, 2018, and as it has been prior to the new tax act, whenever one spouse was required to make spousal support payments pursuant to a separation agreement (the person making the payment is called the "payor" spouse), the payor spouse was able to deduct the amount of the payments from their gross income. The payee ex-spouse had to include the spousal support payments in their gross income. Now the payor ex-spouse will have to pay income tax on their full income even though they will be under a court order to pay over part of their income as spousal support. Additionally, the spouse receiving spousal support payments will essentially be getting tax free money.
New Tax Bill Creates Incentive to Get Divorced in 2018The new tax provisions on alimony do not take effect on divorce decrees and separation agreemetns until 2019. This creates an incentive for those couples desiring a divorce or dissolution to get everything finalized in 2018. This way the payor ex-spouse can have their income reduced by the amount of the spousal support payments, and the payee ex-spouse will pay tax on it.
Can You Negotiate Who Pays the Tax on Alimony Payments After 2019?This gets a little bit complicated. According to the 2018 tax act you can make the new tax provisions for alimony payments apply early, if the separation agreement specifically references the new tax provisions contained in Section 11051. It is theoretically possible to negotiate who pays the tax on spousal support payments for separation agreements finalized in 2019 and after, but by dictating who pays the tax it essentially creates additional income inbalances in the amount of what that tax payment would be.
After 2019, you may want your divorce attorney to include a provision in your separation agreement that whoever receives the spousal support payment has to pay income taxes on it. However, this creates an additional tax problem. First, no matter what you agree to contractually (and the separation agreement is a contract that once approved by the court becomes a court order), the IRS will require the payor spouse to pay income tax on all income received regardless of the provisions in the separation agreement.
For example, if the payor spouse earns $100,000 per year in income, and the separation agreement requires them to pay $20,000 per year in spousal support payments, you may want to include a provision in 2019 and later separation agreements that the payee ex-spouse pays the tax on the $20,000 in spousal support payments. Assuming that the tax rate is 25%, this would result in a $5,000 tax obligation on the $20,000 in spousal support payments. If the payee spouse paid the tax on spousal support, then they would essentially have to give back $5,000 to the payor spouse around tax time each year. This in turn would result in $5,000 in additional income for the payor spouse, income which the IRS will require the payment of income taxes on.
As a practical matter, one way around this may be to calculate what the tax would be on the spousal support payment, and then reduce the spousal support payment by the amount of that tax. Divorce attorneys can get creative, but the IRS will always require payment for income taxes when income taxes are due.