If you pay or receive alimony, you are familiar with the tax consequences; alimony is deductible for the payer, and reportable as income to the recipient. Beginning in 2019, the questionably named “Tax Cuts and Jobs Act” will drastically change the way alimony is treated for tax purposes. Alimony will no longer be deductible or reportable for divorces occurring in 2019 or later. The law, however, is not retroactive; alimony from divorces in 2018 or earlier is not affected.
While this would seem to favor the recipient (generally the woman in a traditional marriage), the impact may not be that simple. Without the benefit of a tax deduction, the payer might argue that he has less disposable income from which to provide spousal support. For example, a man earning half a million a year might be paying $100,000 per year in alimony, which only costs him about $50,000 after the tax break. His ex-wife, in a lower tax bracket, might net $75,000 after taxes. In 2019, that same man may argue that he can only afford $50,000. If successful, the recipient would receive $25,000 less.
After a divorce, the two resulting households cannot operate as cheaply as a single household. The tax deduction helped to mitigate the decrease to the parties combined standard of living. Removing the deduction results in an effective tax increase, and less total income available to the parties. This is the desired result of new law’s designers, who felt that divorced “couples” should not have a tax advantage unavailable to married couples. The result may be more couples remaining unhappily married, because they cannot “afford” to divorce.
Recipients may also have more difficulty funding retirement accounts. Some retirement vehicles, such as IRAs, require contributions to be made from taxable income.
Some states, California for instance, have formulas in place to determine the duration and amount of alimony payments. Nevada does not. The decision whether to award alimony, and for what amount and length of time, is discretionary to Nevada family court judges on a case-by-case basis.
Because alimony awards are so unpredictable, many attorneys prefer to negotiate a settlement on this issue. Without the tax break to the payer, negotiating an agreement may prove to be more difficult. The uncertainty surrounding alimony will also increase. How will each judge react to the tax law changes? How much, if at all, will the new law reduce alimony awards? If you will be involved in a divorce in Nevada that might involve alimony, it is critical that you have an attorney who understands each judge’s feelings about this optional award.