Spousal support can be one of the most contested issues in a divorce action. One spouse believes he or she is owed more money while the other spouse believes he or she is paying too much money. In either case, the court's job is to settle the dispute regarding spousal support when the parties cannot work the matter out between themselves.
Our Michigan spousal support lawyers can help you sort out the details of spousal support, including what is in your best interest now and in the future. With the recent changes to the federal tax laws, spousal support issues have become more complex for many individuals. Therefore, make sure you work with an attorney who understands the tax changes and how the changes impact your financial well-being after the divorce is final.
Who Pays Taxes for Spousal Support Right Now?
If you pay spousal support to your ex-spouse, you are entitled to claim a tax deduction for the amount paid. Your ex-spouse reports spousal support on his or her tax return as income and pays tax on the support payments. In theory, this system worked well because the higher-earning spouse receives a tax credit for paying spousal support, which can lower the individual's taxable income. At the same time, the lower-earning spouse pays income taxes on the spousal support at his or her lower tax rate.
BEWARE! The Laws Regarding Spousal Support and Taxes Are Changing
Beginning with cases completed on January 1, 2019, or later, the spouse receiving spousal support payments will no longer be required to report the payments as income. Therefore, if your divorce is finalized after 2018, your spousal support payments will be tax-free. That is great news for anyone receiving spousal support payments for cases decided in 2019 or later.
However, if your case is decided after 2018 and you are the one paying spousal support, the news is not as good. If you are ordered to pay spousal support to your spouse, and your case is finalized in 2019, or later, you will no longer be allowed to claim a credit for the spousal support payments. In other words, you will pay income taxes on the spousal support payments even though the money did not go into your pocket. For some individuals, the change in the law could mean a significant increase in personal income tax debt.
How Does the Law Impact Negotiating Spousal Support Payments?
In the past, a key factor used when negotiating spousal support was the tax credit the payor would receive for the payments. It is unclear yet how the new tax laws related to spousal support payments may impact couples attempting to settle matters outside of court through negotiation or mediation. It is also unclear what may happen if a party must petition the court for an increase or decrease in support payments. Will the new amount be treated under the 2018 laws or the 2019 laws for taxation purposes? Our Michigan spousal support attorneys continue to watch this matter closely to protect our clients' best interests.
Contact Our Michigan Divorce Attorney for More Information
If you have questions about spousal support and the next tax law, schedule a consult with experienced Michigan divorce lawyer, Cameron C. Goulding today to discuss the specifics of your case in further detail.