Are you thinking about filing for divorce this year? You should speak with a Michigan divorce attorney as soon as possible, especially if spousal maintenance or alimony may be involved in your divorce proceedings. Why do you need to act quickly with regard to matters of spousal maintenance or alimony? In brief, recent changes to the tax law will drastically alter the way spousal maintenance affects an individual’s taxable income. As a recent report from CNN Money clarifies, the tax bill revisions make it such that individuals who pay alimony will lose a significant tax deduction.
How are the changes to the tax law likely to affect you in your divorce case?
Understanding How Alimony Tax Deductions Work After a Michigan Divorce
Under current and previous tax law, anyone who paid alimony or spousal maintenance was able to deduct that amount from their taxable income. This was known as an alimony deduction. In other words, if Spouse #1 made monthly payments of $2,000 to Spouse #2 for alimony or spousal maintenance, that amount would not count as taxable income for Spouse #1 at the end of the year. However, Spouse #2 was required to include the amount of alimony or spousal maintenance payments as part of his or her total taxable income.
How did this work in practice? We will give you an example. Imagine, as we mentioned above, that Spouse #1 makes alimony payments of $2,000 per month to Spouse #2. Without taking alimony payments into account, Spouse #1 earns $200,000 per year, while Spouse #2 earns only $50,000 per year. In total, the monthly alimony payments add up to $24,000 per year. Under the old tax law, Spouse #1 could deduct that amount and thus would have an annual taxable income of only $176,000. Spouse #2, however, would need to add the alimony payments to his or her total taxable income, bringing Spouse #2’s taxable income up to $74,000 per year.
Yet the changes to the tax law repealed the alimony deduction. Now how will alimony deductions work?
Alimony Deductions After the Changes to the Tax Law
It is important to underscore that the changes to the tax law with regard to the alimony deduction do not begin until December 31, 2018. As such, anyone who currently makes alimony payments or who will get divorced this year and begin making alimony payments will not have to deal with this issue. What the repeal means, though, is that Spouse #1 no longer gets to deduct alimony payments, and Spouse #2 no longer has to count alimony payments as taxable income.
Why was this change made? Since Spouse #1 earns more than Spouse #2, that alimony will be taxed at a higher rate if Spouse #1 pays the taxes on it as opposed to Spouse #2. In other words, the government is likely to get more money in income taxes from Spouse #1 than Spouse #2 under the new law on the very same amount of alimony.
According to CNN Money, approximately 600,000 people in the U.S. claimed an alimony deduction for their 2015 income tax returns.
Contact a Michigan Divorce Attorney
If you have questions or concerns about spousal maintenance or alimony and income tax, you should reach out to a divorce attorney in Michigan as soon as possible. Contact the Law Offices of Michael A. Robbins for more information.