For years, the payer of alimony has been able to deduct alimony payments from gross income. The recipient then reported the support as his or her own taxable income.
The alimony deduction rule has allowed an effective tax break for divorced families. The rule has been fair because the entire concept of graduated tax rates is that households who earn more can afford to pay a higher tax rate. The alimony deduction rule ultimately taxed alimony income at the rate of the recipient’s household, which would actually spend the income, rather than at the rate of the payer’s household, which would simply pay it over to the recipient. The net effect of this structure has been that payers could pay a little more alimony due to the tax deduction, and recipients could keep a little more after taxes, because of their typically lower tax bracket.
When deciding alimony amounts, Connecticut recognized that alimony payers were able to deduct their payments from income at tax time.
Alimony Orders Will Decrease
If Connecticut judges used the same alimony formula for post-2018 alimony orders as they awarded for prior orders, newly divorced recipients would get to keep a lot more, 100% of what they receive, tax-free from federal income tax. And payers would have to bear the full out-of-pocket payment cost of the new orders. It would simply not be fair for a new payer to pay the same amount in after-tax dollars as a payer in the same circumstance paid in tax-deductible dollars before alimony tax changes took effect.
How Much Will Alimony Decrease?
That’s the ultimate question. I expect judges and attorneys to wrestle with alimony tax changes well into 2019 and perhaps beyond as different approaches are utilized. I think one way would be to equally divide the actual added cost in income taxes between the two former spouses. In other words, run two different scenarios – 2018 and 2019 tax figures. Calculate how much the alimony payer would have saved each year under the prior alimony tax rule. Then calculate how much extra tax the alimony recipient would have paid under the prior alimony tax rule. Averaging the two numbers and decreasing the alimony amount by the resulting number will equalize the actual tax cost of the lost alimony deduction.
Stamford and Fairfield Alimony Tax Attorney
I represent clients in Connecticut Family Court and Divorce proceedings though out Fairfield County including those who reside in Easton, Fairfield, Monroe, Trumbull, Stratford, Bridgeport, Westport, Weston, New Canaan, Wilton, Norwalk, Darien, Stamford and Greenwich.
Please email me or call me in Stamford at (203) 356-1475 or in Fairfield at (203) 259-5251 if you have questions about alimony tax changes in a Connecticut divorce.