How Recent Federal Tax Code Changes Will Make Alimony Payments Go Up in Florida
Are you a breadwinner planning to get divorced in Florida? Beware -- a new law could make you pay more in alimony.
The new law, called the federal Tax Cuts and Jobs Act (TCJA), went into effect last year. It changed the way the IRS taxes alimony payments. For the last 75 years, spouses paying alimony could deduct the payments from their federal income tax. The spouses who got the alimony paid income tax on the amounts they received.
Starting with people filing (and, in some cases, changing) papers for divorce or separation in 2019, the new law changes the tax situation for both spouses. The paying spouse won't be able to deduct payments. The receiving spouse won't have to pay income tax. As we will explain below, we believe that these changes will hurt paying spouses who are in the higher tax brackets, while having no effect on receiving spouses.
Types of Alimony Payments in Florida
First, let's look at some background information. In Florida, alimony payments are meant only to help the receiving spouse. They are not intended to help the children because child support payments are done separately. There are four types of alimony payments in Florida. All will be affected by the new federal Tax Code changes:
Permanent alimony, as the name suggests, usually lasts as long as both spouses are alive. The amount is based on the receiving spouse's standard of living during the marriage.
Courts presume that permanent alimony is the right option for marriages that lasted longer than 17 years. For marriages that lasted seven to 17 years, permanent alimony may be awarded based on the receiving spouse's needs. For marriages lasting less than seven years, it is awarded only in exceptional circumstances.
Durational alimony, like permanent alimony, is based on the receiving spouse's standard of living while married. Unlike permanent alimony, durational alimony lasts only for a specific period of time. That time cannot be longer than the length of the marriage. It is often awarded for marriages that lasted less than 17 years.
The amount of durational alimony can be modified if circumstances change. However, the time period for which it must be paid can be changed only in exceptional circumstances.
Unlike permanent or durational alimony, the amount of rehabilitative alimony doesn't have anything to do with the standard of living during the marriage. Instead, it is based on what the receiving spouses need after the marriage to get back on their feet. Rehabilitative alimony helps spouses who have not recently been working outside the home. It helps them get back into the workforce and become self-supporting.
The receiving spouses must present a detailed plan for how they will spend the alimony money. Plans may include getting additional education to become up-to-date in their fields or to renew expired professional licenses. Plans could also include education, training, or work experience to develop new marketable skills. Rehabilitative alimony may be changed or ended early if the receiving spouse finishes the plan early or fails to follow the plan. Spouses who receive rehabilitative alimony in Florida often receive durational alimony at the same time.
Like rehabilitative alimony, bridge-the-gap alimony is for the receiving spouse's needs after the marriage is over. It is meant for short-term needs and cannot last longer than two years. Bridge-the-gap alimony is often used to help receiving spouses move out of the home where they lived when married and into their new homes. Once ordered, bridge-the-gap alimony cannot be changed.
How Tax Code Changes Affect Florida Alimony Payments
While the four types of alimony will remain the same, the new tax code changes may change the amounts of alimony awards in Florida. This is most likely to happen when the paying spouse is in a high tax bracket. Let's look at an example to see how this will work:
Say Bob is in a high tax bracket, with an annual income of $200,000. His ex-spouse Mindy is in a lower tax bracket. Bob pays Mindy $4,000 per month in alimony.
Under the old law, Bob gets a big tax break because he is paying alimony. The old law lets him deduct the alimony payments from his income. Because he is in such a high tax bracket, reducing his taxable income by $4,000 per month ($48,000 per year) reduces his tax bill by a lot.
Say that he saves $12,000 per year on his taxes because of the alimony deduction. That means he saves $1,000 per month. So his out-of-pocket cost for paying alimony goes down. His $4,000 alimony payments really only cost him $3,000.
Meanwhile, Mindy, under the old law, pays income tax on the alimony payments she receives. Because she is in a lower tax bracket than Bob, she gets taxed at a lower rate. Say she pays $500 in taxes for each monthly alimony payment she receives. That leaves her with a net alimony payment of $3,500 per month.
In this situation, Bob and Mindy both "win." Bob saves $1,000/month in taxes on his alimony payments. Mindy pays $500/month in taxes on the other end. That's a $500 difference that the federal government covers under the old tax laws. Under the new law, which gets rid of both the tax deduction for alimony payers and the income tax for receivers, that "free" $500 disappears.
Why Paying Spouses Will Need to Pay More
Here's how the new law will affect Bob and Mindy:
Mindy, as we saw earlier, received a net of $3,500 per month in alimony payments from her $4,000 per month award. (Payments that actually only cost Bob a net of $3,000 because of his large tax deduction.) If Mindy's needs stay the same, she will still need a net of $3,500 per month. Under the new law, she no longer pays income tax on her received alimony. So to get a net of $3,500, she needs only a $3,500 payment, not a $4,000 payment like before.
However, for Bob, paying $3,500 per month to Mindy now costs him the full $3,500 out-of-pocket. Without the previous tax deduction, he has to pay more. While before he was only out-of-pocket for $3,000 ($4,000 minus the $1,000 tax break) for Mindy to receive a net payment of $3,500, now he has to pay $500 more.
We believe that judges will increase Florida alimony payments to maintain receiving spouses standards of living after the tax changes go into effect. This will not have an effect one way or the other on the receiving spouses, whose net payments will remain the same. It will, however, increase the out-of-pocket expenses of paying spouses in high tax brackets.
Christian Denmon is a Tampa, Florida Attorney and the founding partner of Denmon Pearlman Trial Lawyers. A truly progressive firm, Denmon Pearlman Trial Lawyers offer legal service in Personal Injury, Divorce, Family law, Estate Planning and Criminal Defense. Christian resides in St. Petersburg, FL with his wife and other partner of the firm, Nicole Denmon, and their two daughters.