The “Tax Cuts and Jobs Act,” signed by the President in December, 2017 makes important changes to how alimony will be treated for tax purposes for all Washington State divorces after December 31, 2018.
Former Alimony Tax Rule
Under tax rules still in effect, alimony, known as spousal maintenance in Washington State, was deductible to the payer and counted as income to the recipient. This meant the person paying the alimony shifted the burden of paying the income tax on the income to the ex-spouse who received it.
Financially, this tended to help increase the total amount of income available to spouses transitioning to two households by shifting the tax burden to the recipient spouse who typically earned lessor income and presumably paid a lower tax rate.
New Alimony Tax Rule
The new tax rule, however, eliminates the payer’s ability to deduct alimony. The payer will now have to pay tax on the income transferred to the ex-spouse recipient. The recipient, in turn, will not have to pay tax on the alimony. For tax purposes, alimony will be treated the same as child support which is not taxable income to the recipient.
New Alimony Tax Rules Start January 1, 2019
The new alimony tax rules will not start until January 1, 2019. Thus, it will not effect any court order or property settlement agreement obtained on or before December 31, 2018.
New Alimony Rules Are Likely to Reduce Monthly Alimony Payments
It is still unclear exactly how the new alimony tax rules will impact divorces. However, there are several likely consequences.
First, since spousal maintenance in Washington State is generally determined by the payer’s spouse’s ability to pay and recipient’s need for it, since the ability to pay will decrease, the amount of monthly spousal maintenance will decrease.
Washington State Courts Will Adjust Court Rulings to Compensate
However, to comply with existing Washington State Divorce Laws, it is likely courts will adjust their court rulings when feasible to achieve fair and equitable results. Indeed, such adjustments are available and frequently done now.
For example, to help offset a payer’s reduced ability to pay monthly alimony, the duration of the alimony obligation may increase. Another possible adjustment is to award a larger percentage of the property in lieu of reduced alimony payments. Washington State family law expressly provides that property award and spousal maintenance are interchangeable, such that a larger property award may be used to offset a lower spousal maintenance award, and vice-versa.
Some Cases Will Remain Problematic
There may be cases with factual circumstances that simply don’t lend themselves to relatively easy adjustments such as those described. It is yet to be seen how Courts and/or the state legislature will address the alimony tax code change overall, and specifically scenarios where the availability of adjustments is limited.
If you are currently divorcing or about to start the process, please call us at (425) 374-4045 or contact us online to request an appointment to see how the new alimony tax code provisions may impact you. Weintraub Law Office has offices in Seattle, Bellevue, and Bothell and represents clients in King, Snohomish, and Pierce County.