You probably already know that the new tax bill will create sweeping changes in a number of areas, but you might not have heard that alimony is where some of the biggest changes will occur. Here’s what you need to know about current alimony laws, the changes set to occur, and how they are likely to affect you.
Florida Alimony Law as It Stands
Alimony in Florida is defined as the money one spouse pays to the other after marital separation or divorce. Generally speaking, the spouse who earns the least will be supported by alimony payments after the split.
To determine the amount of alimony, Florida law looks at the following things:
- The receiving spouse’s need for financial assistance
- The couple’s earning level when they were married
- The length of the marriage
- The age of the spouses
- The emotional and physical health of each spouse
- The assets in the marriage
- The assets outside the marriage
- The amount each spouse financially contributed to the marriage
- The amount able to be earned by each spouse
How the Current Law Affects Your Taxes
Under current law, the spouse who pays alimony can claim the payments as a tax deduction, and the spouse who receives the alimony payments reports them as taxable income.
Additionally, the following conditions apply under the tax laws:
- The ex-spouses file separate returns.
- The ex-spouses live in separate dwellings.
- The alimony payments are made according to the terms of the settlement or divorce decree, and they are always made with cash, checks, or money orders – never with personal property or in-kind offerings.
- The alimony payments are paid on a set schedule, not in advance.
- The alimony payments continue until the receiving spouse remarries or dies, or as defined by the court.
How the New Law Changes Alimony
Beginning Jan. 1, 2019, alimony will not be a tax deduction for payers, nor will it be taxable income for recipients. This is similar to how child support payments are not reported as taxable income.
Currently, around 600,000 Americans use the alimony deduction. However, it is important to note that the new law will not be retroactive for those currently paying or receiving alimony – only those who separate or divorce after Dec. 31, 2018 will be affected.
That’s still likely to impact a lot of people, though. Over 800,000 couples divorce each year, and the new law will apply to any of those cases that involve alimony.
Some critics say this new law will make divorce settlements more difficult to obtain, since the deduction was previously used as a bargaining chip. They argue that the paying spouse may not agree to pay as high of an amount as before, knowing they will need to pay taxes on it. The change may initiate yet another state-based alimony reform bill, something that has already recently been vetoed by the governor twice.
An Example to Consider
Let’s look at how one hypothetical couple’s alimony arrangement would change from the current law to the new law.
When the couple was married, the husband made $200,000/year and the wife did not work. They were in a 25 percent tax bracket, meaning they paid $50,000 in taxes. (We’re skipping over deductions in the interest of keeping the numbers as simple as possible.)
In the first scenario, this couple divorced in 2016 and the husband was ordered to pay $80,000/year in alimony to the wife. Naturally, he took a tax deduction on the payments. Because of this, his tax liability was reduced to $120,000 per year, so he only had to pay $24,000 in taxes. The wife reported the alimony as taxable income and had to pay $16,000 in taxes. Together, they paid $32,000 in taxes, which is less than the $50,000 they paid when married.
In the second scenario, the same couple divorces in 2019. The husband will still pay $80,000 in alimony, but have no tax deduction. He will stay in the 25 percent tax bracket and pay $50,000 in taxes. The wife will receive $80,000 and pay no tax on the amount.
How the New Law Will Affect You
The answer depends on whether you believe you are likely to be paying or receiving alimony.
If you are seriously considering separation or divorce and you believe you will have to pay alimony to your future ex, it may be in your best interest to contact a Florida family lawyer immediately and get the process going now, before the new law takes effect. As long as the separation or divorce is final before Dec. 31, 2018, your agreement will not be subject to the new law, and you will be able to keep more of your money.
However, if you believe that you will be the one getting alimony, it is in your financial best interests to wait until the new law goes into effect. Why? Because you’ll be able to keep all of your alimony completely tax-free.
Of course, you should keep in mind that more reforms could be introduced at the state level to counteract the big changes at the federal level. If you have questions, now is the time to ask. Schedule a free consultation today with a family law attorney.