On December 22, 2017, the Tax Cuts and Job Act (H.R.1: Public Law No. 115-97) became law and will have far-reaching effects on all aspects of our economy, including divorce. Under pre-Act law, alimony and separate maintenance payments were deductible by the payor spouse under Code Sec. 215(a) and includible in income by the recipient spouse under Code Sec. 71(a) and Code Sec. 61(a)(8). The deductibility provision essentially provided a government subsidy in the amount of the payor’s tax rate for alimony payments. Under the new law, with respect to any divorce or separation agreement executed after December 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and not includible in the income of the payee spouse. Rather, income used for alimony is taxed at the rates applicable to the payor spouse.
The alimony deduction has been in the Tax Code since 1942. Will the repeal spur a divorce surge in 2018? It is widely recognized that the repeal reduces the bargaining power of people receiving alimony, mostly women, in achieving financial stability after a divorce. According to the most recent U.S. Census Bureau of Statistics, 98% of 243,000 people who received alimony payments last year were women.
Elimination of the deduction should lead to more revenue for the government because the alimony payments will be taxed at the higher rate of the payor spouse. It could also result in individuals less willing to pay alimony, since it will no longer be deductible. Time will tell. But until then, the deductibility sunset is fast approaching.