Spousal Support: To tax or not to tax – that is the question…

Spousal support as we knew it

Under the general principles in Michigan law and IRS regulations (IRC 71 and IRC 215), regarding an award of spousal support, the award is tax deductible to the person paying spousal support. Conversely, spousal support is taxable to the person receiving spousal support. The well-known axiom above had long been considered a boon to the person paying spousal support, a benefit for having to pay the spousal support obligation. As the person receiving, spousal support it was a form of income and was taxable.  Under tax reform, the question to tax or not to tax is the question.

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Tax reform and spousal support

Fast forward to current days where President Donald Trump’s recently passed tax code carries far-reaching ramifications for spousal support scenarios.  Effective January 1, 2019, and thereafter, the deduction benefit for paying spousal support will no longer exist. Leading to a variation of Shakespeare question in Hamlet. “To tax or not to tax – that is the question…”.

Consider the following scenario. Often, spousal support is a negotiated figure and aspect of the overall settlement. A higher earning spouse may be persuaded to pay a higher amount in alimony to the dependent spouse. The reason why? The person paying spousal support knows a deduction is coming his or her way and can provide a significant motivating factor in paying an overall higher award. In less than year, that exemption (and motivating factor) will be gone for cases resolved after January 1, 2019.

The spouse receiving the spousal support award must also be considered. She or he may end up settling for less as the tax incentive no longer exists for the payor. Thus, the payee may lose out financially as well.

What does this mean in the interim for spousal support?

While the tax reform will not begin to truly play until next year when 2018 taxes come due, parties contemplating divorce or are in the midst of one, may be considering their options. Both parties may feel they are losing out financially. In divorce cases, very often there are limited assets to divide. Spousal support has been a substantial mechanism for leverage and opportunity for potential settlement. Cases may become more acrimonious as spousal support as we knew it is ending.

To tax or not to tax – that is the question… What can you do regarding current spousal support implications?

Whether you are the potential payor (person paying spousal support) or payee (person receiving spousal support), talk to an experienced attorney at Findling Law. The attorneys at the firm know that times, as well as the laws, change. They are skilled at crafting creative solutions and resolutions to cases. Speak with Findling Law today to see what options may exist for you and your specific scenario.

By:  Kristina Bilowus.

About Findling Law

Findling Law, PLC – 414 W. 5th St. Royal Oak, Michigan 48067

Phone:+1 (248) 399-3300
After hours emergency?+1 (707) 968-7347

Email:Daniel@Findlinglaw.com

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I have been exclusively practicing divorce and family law in Michigan for over two decades.  The attorneys at Findling Law all share the core value of practicing law to help people navigate change in their lives, without compromising principles.  We specialize in high socio-economic, high-profile and high-conflict cases, while also working with clients of all backgrounds. We recognize that the most important aspect of the practice of law is the application of the law to your specific circumstances.That is why we provide more free information on divorce and family law than any other Michigan law firm. We want to help you manage your situation. Allow our exceptional legal team to help you navigate the change in your life, without compromising principles.

By:  Daniel Findling

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