Robert couldn’t believe what his accountant was telling him. After eighteen years of marriage, he and Katherine had finally reached a divorce settlement. Robert would pay Katherine $12,000 per month in spousal support for seven years—$1,008,000 total. The settlement was finalized in March 2019, and Robert had assumed the alimony would be tax-deductible, just as it had been for generations of divorced Americans.
But the Tax Cuts and Jobs Act of 2017 had eliminated the alimony deduction for divorces finalized after December 31, 2018. Robert’s divorce decree was entered in March 2019—just three months too late. The tax hit? Approximately $50,000 more per year than he’d anticipated—$350,000 over the seven-year support period.
The Old Rules: How Alimony Taxation Worked for Decades
For almost 80 years, alimony had been tax-deductible for the payor and taxable income for the recipient. This treatment made economic sense: the payor received a tax benefit that effectively reduced the cost of alimony, while the recipient paid taxes at their (typically lower) rate. The arrangement created tax efficiency that benefited both parties.
The Tax Cuts and Jobs Act: What Changed and When
The Tax Cuts and Jobs Act of 2017 eliminated this tax treatment for divorces finalized after December 31, 2018. Under the new law, alimony is not deductible for the payor and is not taxable income for the recipient. This change affects only new divorces—divorces finalized before 2019 remain under the old rules unless the parties specifically agree to opt into the new treatment.
The Financial Impact: How Much More Alimony Really Costs Now
The shift has profound effects on divorce economics, particularly for high-income couples. Under the old rules, a payor in the 37 percent federal tax bracket paying $100,000 annually in alimony could deduct that amount, saving $37,000 in federal taxes. The net cost was $63,000. The recipient might pay 22 percent federal tax on the $100,000, leaving them $78,000 after tax.
Under the new rules, the payor pays $100,000 without any deduction, bearing the full cost. The recipient receives $100,000 tax-free, a $22,000 improvement over the old rules. The payor’s cost increased by $37,000 while the recipient’s benefit increased by $22,000.
Strategic Implications for Divorce Negotiations
This shift creates several strategic implications. First, alimony becomes more expensive for payors, potentially reducing the amounts they’re willing to offer. Second, the change increases the advantage of property division over alimony—dividing assets is tax-free under Section 1041, while alimony has no tax benefit. Third, lump-sum alimony settlements become more attractive.
Property Division vs. Alimony: The New Calculus
A payor might prefer to give the recipient an extra $500,000 in assets rather than commit to $100,000 annual alimony for seven years ($700,000 total), because the $500,000 property transfer is tax-free while the alimony costs $700,000 with no tax benefit.
Modification Pitfalls: Protecting Old Tax Treatment for Pre-2019 Divorces
Fourth, the change may affect modification disputes for pre-2019 divorces. Parties with decrees finalized before 2019 remain under the old tax rules. However, if they later modify their alimony provisions in certain ways, they might inadvertently trigger application of the new rules. Parties and attorneys must be careful when modifying alimony to preserve the old tax treatment.
What Robert Should Have Done Differently
In Robert’s case, if he had understood the tax consequences sooner, he might have negotiated differently. Rather than agreeing to $12,000 monthly alimony for seven years, he might have proposed $8,500 monthly alimony plus a larger property settlement in Katherine’s favor. The reduced alimony amount would reflect the lack of tax deduction, while the additional property would compensate Katherine for the lower monthly payment.
Planning Guidelines for Recipients: Adjusting Support Requests
Recipients should recognize that while they pay no tax on alimony received, they also must plan for their full financial needs without the inflated gross amount that previously compensated for taxes. A recipient who needs $8,000 monthly after taxes now requests $8,000 monthly and receives the full amount tax-free, rather than requesting $10,000-$11,000 to account for tax liability.
Planning Guidelines for Payors: Understanding Your True Cost
Payors should recognize that they bear the full tax burden on alimony payments. A payor earning $500,000 annually who agrees to pay $150,000 annual alimony will pay income tax on the full $500,000, then pay $150,000 in alimony—a dramatically different financial picture than under the old rules where the alimony would have been deductible.
How Anunobi Law Can Help
Issues involving high-net-worth divorce, complex assets, and cross-border or business-related disputes require experienced legal guidance. Anunobi Law regularly assists clients with the specific issues discussed in this article. If you have questions, need advice tailored to your circumstances, or would like to discuss how these issues may affect you, please contact Anunobi Law to schedule a confidential consultation.
Legal Disclaimer
This article is provided for general educational and informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship between you and Anunobi Law. Every legal matter is fact-specific, and the application of the law may vary based on individual circumstances. You should consult a qualified attorney regarding your particular situation before taking or refraining from any action.
Any stories, names, or scenarios described in this article are hypothetical and used solely to illustrate legal principles. They are not intended to describe real individuals or actual cases.