Divorce & Family Law Column By:
Chadwick M. Layton, Esq.[i]
Harvey Waddell & Layton, P.A.
ALIMONY HURTS MORE UNDER NEW TAX LAWS
Traditionally, the payor of alimony received a tax break for paying alimony. The provision in the tax code allowed the higher earning ex-spouse to subtract from his or her earnings the money paid to a former spouse for spousal support or alimony.
Income taxes were captured on the alimony payment by requiring the recipient ex-spouse to report the income and pay taxes on this amount under his or her income bracket. Typically, the ex-spouse receiving the alimony payment had a lower income and thus paid a lower tax rate on the alimony dollars than the party that made the alimony payment.
The tax effect of the alimony obligation is a very important aspect that should be addressed in divorce negotiations. In the past, Palm Beach County divorce attorneys have utilized the alimony tax write off for the higher earning spouse to create the best available after tax alimony solution for both parties. This method allowed the ex-spouses to create the greatest number of after tax dollars.
The new tax code closes this loophole. The tax roles have essentially switched, where the party receiving alimony does not have to pay taxes on the support payment. The payor spouse will in turn lose their tax write off for the alimony payment made. The concern is that the higher earning spouse will have less of a tax incentive to with regards to alimony. Therefore, ex-spouses receiving alimony may now receive a lower total support payment and they will not pay taxes on this support. The tax benefit to the party receiving the alimony will very likely not off-set the lower amount they receive.
The net effect of the tax change to alimony is that the payor of alimony, in the higher tax bracket, will now pay taxes on the alimony dollars. The payee ex-spouse, in the lower tax bracket, will not pay taxes on the alimony received, but, he or she will very likely receive a lower gross payment of alimony. The government is the winner here by collecting a higher percentage of the alimony dollars paid.
[i] Chadwick M. Layton is a partner and shareholder at Harvey Waddell & Layton, P.A., located in downtown Lake Worth, he is also a member of the Florida Bar Family Law Section and the Susan Greenberg Family Law American Inn of Court of the Palm Beaches, further information is available at www.LaytonLawOffices.com