President Trump knows a thing or two about divorce and alimony. First Lady Melania is his third wife, and he had to pay a significant chunk of change to his previous wives when they split up. We would wager he has some pretty strong opinions on this area of the law.
It is interesting that the tax bill he championed in late 2017 has had a significant impact on the way spousal support (aka alimony) is calculated and taxed. Our firm has been helping divorcing families in the Reading area understand and adjust to the new law.
First, The Tax Side of Things
Although the “Tax Cuts and Jobs Act of 2017” made headlines for many things — reducing business taxes, increasing the standard deduction, limiting deductions for state and local income taxes (SALT) and property taxes, and repealing the individual mandate of the Affordable Care Act (ACA) — at the time it was passed, few people realized the significant impact it would have on divorces.
Under a provision of the law that went into effect on January 1, 2019, alimony is no longer tax-deductible by the spouse making such payments. This will mean the contributing spouse’s tax bill is probably going to go up, shrinking the money available to the split-up couple.
On the flip side, the spouse receiving such payments will no longer need to declare those payments as taxable income. This partner’s tax liability may therefore decrease.
Unfortunately, both parties may end up with less money overall because Uncle Sam is taking a bigger chunk of the payor’s money before it is divided up.
Pennsylvania Changed Its Law Because Of This
The Pennsylvania Supreme Court responded to the changing tax law by updating the court rules that dictate how spousal support and child support payments are calculated.
The new formula takes varying percentages of the respective parties’ net income and subtracts them from each other. The percentages utilized depend on whether child support payments are also exchanging hands.
In most cases, the payor will be transferring less money to the recipient than they would have under the old guidelines. This will, in theory, help the payor, who is going to be paying more in taxes since support payments are no longer tax deductible.
The recipient is getting less money, but does not have to report any support payments received as taxable income.
Did Trump Know This Would Happen?
Many of us in the family law world wonder what President Trump would think about the new tax law and Pennsylvania’s response to it. It is unlikely he is the architect of this provision since Congress takes the lead in drafting and passing legislation. But he did sign the law, and his careful attention to the tax laws and his experience to divorce makes us suspect he would have an opinion on it if asked.