Legal Review: Tax Changes Drastically Impact Alimony Negotiations in Divorce

By Family Law Attorney Sara Khaki, founder and owner of Atlanta Divorce Law Group. 

The 2017 Tax Cuts and Jobs Act (TCJA) made extensive changes to many different aspects of corporate and individual taxation. From corporate tax cuts to increases in the estate tax limit, most individuals felt the impact of the changes in some way or another.

One of the more significantly impacted areas, however, has been divorce and alimony, because the TCJA turned the negotiation of alimony between spouses completely on its head.

“Under the old tax laws, alimony payments were an above-the-line deduction, meaning that for the individual making the payment, it’s as if they never actually earned what they paid out,” said Sara Khaki, an Atlanta Alimony Attorney with the Atlanta Divorce Law Group. “It gave the spouse seeking alimony payments a very powerful tool to argue for a higher alimony payment.”

The spouse receiving alimony had to claim the payment as income, meaning that it was taxed, but because a spouse receiving alimony very often had a low income, the taxation was much less than it would have been in the hands of the higher-earning spouse. This normally resulted in a positive result for both parties — more income for one and less tax for the other.

Under the TCJA, this scenario is reversed. Alimony payments are no longer deductible by the spouse paying, but they are not treated as income to the spouse receiving them. The argument in favor of this change is that the spouse receiving the income will have more spending power, and since it will not get added to any other income the may have, there is more of an economic impact overall for the spouse receiving the funds.

However, what it has also done is give more power to the higher-earning spouse, who is now able to tell the other spouse that because of the increased amount of taxes owed, the actual amount of money available to make alimony payments is much lower. The pot of money from which to make the payment is significantly reduced.

This change should not mean that any spouse should simply take less and be happy with it. There are many other ways to balance out the reduced alimony available in a divorce settlement that can have tax advantages.

For example, the lower-earning spouse may be able to negotiate a larger portion of the other spouse’s tax deferred retirement account by arguing that those are dollars that will be more valuable to the lower-earning spouse in the future, in exchange for lower alimony payments.

If you are considering divorce, you should consult with an experienced Atlanta Alimony Attorney to fully understand what may be available to you from an income standpoint in divorce, and to better understand what other options may be available in negotiation. A good alimony attorney should be creative and attuned to your needs, and use that to successfully negotiate in your favor.