As the new year begins, the change in alimony brought about by the tax law passed last year goes into full effect. The implications for couples considering divorce in Michigan are not inconsequential. Under the previous law, the person paying alimony was able to deduct the amount of alimony from his taxable income, and the recipient paid income tax on the amount received.
Under the prior law, the amount of alimony had the potential to reduce the tax liability for the payor. For example, if a person making $300,000 per year agreed to pay $70,000 in alimony in 2018, it would have reduced that person’s taxable income to $218,000, including the standard deduction. Using those same numbers under the new law, the payor’s taxable income would be $287,800 after the new standard deduction amount of $12,200. After the $70,000 in alimony is paid, the net income is $154,076.
The recipient in this scenario makes $80,000 per year. In 2018, the $70,000 in alimony would be added to the salary as income. The gross income of $150,000 becomes taxable income of $125,422 after deductions, including a head of household deduction. Under the new law, the taxable income is $61,650. The alimony is not added as income, and the standard single-filer deduction is $18,350.
At first glance, the effect of the change appears to be positive, at least for the recipient. However, the combined income for the two paints a different picture. While the recipient appears to gain, the payor has less income to work with, and so the amount available for alimony may be less.
A person considering a divorce in Michigan faces the challenge of dealing with the new rules. A consultation with an experienced family law attorney could provide one with options and valuable information regarding the new tax law effects on divorce in 2018. Divorce can be difficult, but a knowledgeable lawyer may be able to ease the process.