Potential impact of new federal tax law on Delaware alimony awards

Federal tax law will treat alimony very differently after 2018.

Alimony is the payment of money for support from a former spouse to his or her ex-wife or ex-husband after divorce. The transfer of money from the spouse with the higher income or net worth to the other spouse can have a major affect on the lifestyles of each of them. For example, the loss or gain of money from alimony payments may determine the kind of homes or cars each can afford, the level of debt they each must maintain and the amount of money available for leisure or travel.

Current law

For 75 years, federal tax law has allowed the payor of alimony to deduct those amounts paid on his or her federal return. This deductibility makes spousal support easier for the payor since it reduces the amount of income on which he or she is taxed, sometimes enough to move him or her into a lower tax bracket.

Conversely, an ex-spouse who receives alimony payments must report them as income on which taxes will be calculated and due.

Tax law changes turn alimony on its head

The new federal tax bill changes this arrangement for separation agreements and divorces entered into after 2018. For divorces on or after January 1, 2019, alimony will no longer be deductible to the payor nor will the recipient need to pay income tax on it.

People with existing divorce orders before 2019 will not have their alimony tax treatments change.

Some family law advocates are apprehensive because if alimony payors can no longer deduct alimony payments from taxable income, they may be less likely to agree to generous awards (or any award) in settlement negotiations and may fight harder in court in opposition.

According to a PBS article provided by the Associated Press, 98 percent of those receiving alimony in 2016 were female, citing the U.S. Census Bureau. Advocates for women are concerned that the change in alimony tax treatment could negatively impact the standards of living of divorced women, especially those with children, because paying alimony will be more expensive for the former spouses and therefore more resisted.

Anyone currently involved in a divorce or who is considering one should seek immediate legal advice from an experienced divorce lawyer. There may be reasons to seek to finalize matters before 2019 to take advantage of the current tax rules. An attorney can analyze the family circumstances and discuss the potential scenarios from a tax standpoint.

Practically, negotiations to try to settle alimony in divorce may be more contentious under the new law because spouses who are better off and potentially liable for alimony may be more opposed to a settlement. If parties cannot settle, judges will have to determine whether alimony is warranted and how an award will be structured under the law.

In Delaware, the tax consequences of alimony is a relevant factor that must be considered by a judge in making an alimony decision. After 2018, parties and their attorneys will need to be sure that judges are educated about the new federal tax law and its impact on the future bottom lines of the parties vis-à-vis alimony.

Attorney Dean Betts at Tunnell & Raysor, P.A., with five offices in Delaware, represent spouses in divorces, providing advice and advocacy on a wide variety of related legal matters, including alimony.