Is Alimony Gone Forever?

Alimony.  The word alone conjures fear in the minds of many. There is fear about being constantly in court, paying forever, and being taken to the cleaners. In 2019, the government changed alimony forever, and alimony will no longer function for post-2019 divorce cases as it had in the past.  The new tax rules do not affect pre-2019 cases that included alimony awards unless alimony is modified, in which case a court could apply the new rules or the old rules.

Beginning January 1, 2019, alimony awards are no longer tax deductible to the payor of alimony and are no longer includable in the taxable income of the recipient. The old system actually created a unique tax-planning opportunity which made sense when thinking of money being taxed and the net income being used in two separate households instead of one. Thus, under the old rules, income that was paid as alimony would be deducted from the payor’s income at tax time, often being taken from the top of the payor’s highest bracket, and providing it to a former spouse who is probably a lower wage earner, where it would be taxed at his or her tax rates, which were often lower, sometimes significantly lower than the higher wage-earner.  This created savings for the family as a whole, so that income, perhaps taxed at 30%, was now being taxed at 20% or less. The higher the alimony award, the more savings were had.

Now, income will be taxed in the household of the payor at the highest rates for that payor, and then paid to the former spouse with taxes already taken out.  Thus, the income is taxed at the highest rate, which is good for the government, but not so good for the family. The family is losing the difference between the payor’s highest rate and the recipient’s. There will be less money for everyone in the family under this new system.  The recipient will receive the alimony net of taxes so no taxes will be owed, and all things being equal, it will mean that it will be less net income for the recipient.

Since there are no longer tax advantages to alimony,  there is no difference between calling something “alimony” and calling it something else like “housing support.” Alimony will still be present in cases where there is a significant difference in the incomes of two spouses.  However, because it can now be called by other terms without the stigma of the word “alimony,” perhaps the anger and fear the word caused can fade away.