The Tax Cuts and Jobs Act of 2017 made divorce quite possibly much more expensive. Beginning for divorces executed in 2019, alimony paid by one spouse to another spouse is no longer deductible by the spouse making the payments. Inversely, the alimony is not taxable to the spouse being paid.
On the face of it, this sound pretty good for the payee. You no longer have to pay taxes on your alimony!
But the problem is that the payor, who is likely to be in a higher tax bracket than the payee, will no longer be able to reduce his or her or his taxable income by the amount of the alimony paid.
For grins (or perhaps groans), let’s look at an example.
Billy Bob and Billie Jean get divorced on January 1, 2019. Billy Bob earns $150,000 per year. Billie Jean does not work. As part of the divorce settlement, Billy Bob must pay $30,000 in alimony per year.
Using 2019 federal tax rate schedules, and assuming both deduct only the $12,200 per year 2019 standard deduction, Billy Bob would pay $27,295 in federal taxes in 2019. Billie Jean would pay no taxes on her alimony.
If the divorce agreement had been finalized one day earlier, December 31, 2018, Billy Bob would have reduced his taxable income by the $30,000 in alimony paid to Billie Jean. As a result, his 2019 federal taxes would be $20,095, fully $7,200 less than under the new laws. Billy Bob is in the 24% federal tax bracket.
Billie Jean would have to pay taxes on the $30,000 received had the divorce been finalized in 2018, but after taking into account the $12,000 standard deduction, her federal taxes would be $1,966.
So some might think, GOOD! Now Billie Jean doesn’t have to pay taxes! Good for her!