The new income tax changes approved in December will have an enormous impact on couples who are divorcing in Texas, especially if an alimony arrangement is part of the divorce settlement.
How do the new tax rules affect those who make or receive alimony payments in Texas?
Keep reading – if you’re considering or anticipating a divorce in this state, you should know.
The current and new IRS rules regarding alimony are explained below.
The new rule will apply in all fifty states, in every divorce that involves alimony, starting in 2019.
If you’re planning or expecting to divorce in this state, how the rule may apply in your own circumstances is something you should discuss – as soon as possible – with a skilled Dallas divorce attorney.
DOES THE NEW IRS RULE AFFECT ALIMONY PAYMENTS?
The first thing to understand is that the new IRS alimony rule will not take effect until January 2019, so any divorce that is finalized this year will not be affected, and no one who is currently paying or receiving alimony will be affected either.
The new rule does away with the alimony deduction.
Some divorce lawyers believe that abolishing the deduction will make it tougher to negotiate alimony arrangements beginning in 2019.
Exactly what is the new tax deduction rule regarding alimony?
For couples whose divorces are finalized on or subsequent to January 1, 2019, ex-spouses who make alimony payments will no longer be permitted to deduct the alimony figure, and ex-spouses who receive alimony will not be required to pay taxes on the alimony because it will no longer be counted as taxable income.
WHO BENEFITS FROM THE NEW RULE? WHAT ARE THE FIGURES?
Here’s what will happen: Let’s say that ex-Spouse Blue is now paying $30,000 a year in alimony.
Ex-Spouse Blue is taxed at 33 percent, so the alimony deduction is good for $9,900.
Blue’s ex-spouse, Red, earns less, is taxed at 15 percent, and pays taxes on the alimony amount because it is counted as income.
Ex-Spouse Red pays $4,500 a year to the IRS on the alimony amount at the 15 percent rate.
But without the deduction, ex-Spouse Blue would have owed $9,900 in taxes on the $30,000 alimony amount.
The current rule lets the ex-partners keep $5,400, and it makes paying alimony easier for the paying spouse.
The $5,400 savings will vanish when the new IRS rule goes into effect.
How many divorced persons will be impacted by the new tax changes?
The federal government offers startlingly inconsistent statistics.
The Census Bureau reports that 243,000 divorced persons received alimony in 2016.
However, the IRS tells us that only 178,000 taxpayers claimed to receive alimony in 2015, but 361,000 persons told the IRS that they paid alimony in 2015.
WHAT IS THE TAX DIFFERENCE BETWEEN CHILD SUPPORT AND ALIMONY?
Congressional advocates of the new IRS rule argued that the current alimony deduction acts as a “subsidy” for divorce.
They further contended that the IRS should consider alimony like child support, which is not taxable for parents who are receiving it or deductible for parents who are paying it.
Over four million parents received child support in 2016, according to the Census Bureau.
Lawmakers and attorneys are warning that the elimination of the alimony deduction will decrease the amount of alimony that former spouses receive.
A family law attorney told the New York Post that starting in 2019, divorced persons who receive alimony payments will lose up to fifteen percent of the amount they obtain now.
One Certified Divorce Financial Analyst (CDFA) agrees. Nancy Hetrick, a Phoenix CDFA, explained to CNBC, “Alimony payers won’t be able to afford to give as much because they’ll have to give it to Uncle Sam instead. There will be less money to go around to support the two households.”
HOW DO TEXAS COURTS HANDLE THE ALIMONY QUESTION?
In Texas, alimony is difficult to obtain and is rarely approved.
To receive alimony in Texas – where the legal term is “spousal maintenance” – the party seeking it must show the court that when the marital assets and liabilities are divided, the divided resources will not meet that party’s minimum reasonable needs.
But even if the insufficiency of the divided marital assets can be demonstrated to the court, it’s still only the first step toward obtaining alimony payments.
The divorcing partner who is requesting the alimony must additionally show the court that at least one of these conditions applies:
- The marriage lasted a decade or longer, and the spouse requesting alimony is making a genuine effort either to earn an adequate income or to acquire vocational skills.
- The spouse requesting alimony struggles with an incapacitating disability.
- The other spouse has perpetrated domestic violence.
- A minor or adult child of both partners has a physical or mental disability that prevents the spouse seeking alimony – as the child’s caretaker – from earning an adequate income.
DOES TEXAS IMPOSE LIMITS ON ALIMONY PAYMENTS?
If a Texas judge determines that a spouse who requests spousal maintenance is eligible to receive it, the judge then must decide how much alimony will be paid and for what length of time.
The amount of court-ordered alimony is capped by Texas law.
An ex-spouse cannot be ordered to pay more than $5,000 a month in alimony or more than 20 percent of his or her average monthly gross income, whichever is lower.
Texas also limits the length of time that alimony is paid or received unless the divorcing couple are the parents of a disabled child, or unless the spouse requesting alimony is disabled.
Alimony cannot be ordered for longer than five years if the marriage lasted less than twenty years.
If the marriage lasted from twenty to thirty years, alimony cannot be ordered for more than seven years.
And if the marriage exceeded thirty years, alimony cannot be ordered for more than ten.
I’M THINKING OF GETTING A DIVORCE, SHOULD I ACT NOW?
Spousal support can be modified or terminated when changing circumstances in the ex-partners’ lives warrant such a change.
Remember – the end of the alimony deduction does not affect you if you are currently receiving or paying alimony, and it will not affect anyone who has a divorce finalized this year.
The rule takes effect in 2019.
However, if you’re considering divorce in the Dallas-Fort Worth area, you should take into account the possible impact of the new rule on your own financial situation, because it might be in your interests to file for divorce now rather than waiting.
Schedule a meeting right away with a qualified Dallas divorce attorney who can explain how the new IRS rule may affect you personally – along with explaining your other divorce rights and options.