New Tax Law: If You Wait To Divorce, Alimony You Pay WON’T Be Tax Deductible
It’s official: Congress has passed the most sweeping tax overhaul in decades. The expansive tax code changes will impact taxpayers of all walks of life, including a very big tax implication for divorcing spouses who pay or receive alimony.
What will change?
Under the current system, the spouse required to make alimony payments (aka the payor spouse) is able to deduct alimony payment amounts from their income come tax time. After the new provisions of the Tax Cuts and Jobs Act go into effect, however, this tax break is no more. For any new divorce or separation agreements executed after December 31, 2018, the payor spouse must include alimony as part of their taxable income.
If your income is $200,000, for example, and you pay $50,000 per year in alimony, under the old tax rules, you were able to deduct the $50K right off the top, giving you a taxable income to start of $150,000, an amount that could land you in a lower tax bracket, thus lowering your overall tax burden. Starting in 2019, this $50,000 will be considered part of the payor’s taxable income with no break. Bottom line: If you pay alimony, you will be taxed for this money.
Are you the spouse who receives alimony? For you, the tax laws work in reverse. Under the old rules, spousal support payments counted as taxable income. (So that $50,000 would have been your taxable burden under the old rules.) Under the new rules, alimony will become essentially tax-free for recipient spouses.
Important note: The new rules won’t affect anyone with an existing alimony order. Divorce and separation agreements outlining alimony that are put in place before the deadline of December 31, 2018, the date upon which the old rules expire, will be considered “grandfathered” in under the old rules. If you divorced in 1998 or 2008…or you will finalize your divorce in 2018…the old tax deduction rules for alimony will still apply.
The clock is ticking
If you and your spouse are locked in a contested divorce that is beginning to feel like it could go on for years — or if you and your spouse have separated, but just have not gotten around to filing for divorce, it’s time to take stock:
- Will you need to pay alimony as part of your divorce settlement, or as part of a separation agreement (temporary alimony)?
- Do you have an idea of how much you will need to pay? What is the annual total? How long does your order require you to pay spousal support? (What is the duration of the alimony?)
- What is your tax situation? Do you have other deductions or would alimony be a key break on how much you own Uncle Sam?
- What is your overall income? You earn money and now you will need to pay alimony…can you really afford to pay more in taxes on top of that?
It could be that 2018 is about to become a crucial time for you to move forward purposefully to ensure that your settlement is finalized by this time next year to take advantage of the old tax rules. If you are embroiled in a highly disputed divorce — or know that you want to divorce, but don’t know how to get started — we encourage you to come in for an initial consultation with one of our highly skilled family law attorneys to understand your options for resolving your divorce in 2018. Divorce can typically take a year, so if you are certain that a divorce is in your future, do not delay in creating a clear strategy for a fair settlement.
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