If you and your spouse have made the decision to divorce, but haven’t yet taken any legal steps yet to end your union, there’s one big reason why getting your divorce wrapped up this year is crucial.
Why the divorce rush is on in 2018
Beginning January 1, 2019, a new tax laws goes into effect that will change how alimony is treated on tax returns.
Under the current system, spouses required to make alimony payments (aka payor spouses) are able to deduct alimony payment amounts from their income come tax time. Once the new rule takes 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. As a result, the payor spouse may also see an increase in the amount they owe Uncle Sam.
And here is why the clock is ticking: these new rules do NOT apply 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.
How the new alimony tax law works
Tax laws are never the easiest rules to understand, so let’s a closer look at how this one will work.
Let’s say your income is $200,000, and you pay roughly $50,000 per year in alimony. Under the current tax rules, you can 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, however, 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.
The divorce 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?
The next six months have become crucial time for you to move forward purposefully to ensure that your settlement is finalized by year’s end to take advantage of the old tax rules.
As a reality check, this blog is being posted on July 11 with 173 days to go until the December 31st deadline. There is still time to get your divorce decree (and alimony agreement) in place, but it’s in your best interests to start the ball rolling NOW!
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 a free consultation with one of our highly skilled family law attorneys to understand your options for resolving your divorce in 2018.
Don’t delay in creating a clear strategy for a fair settlement. Safeguard your future. Call us today at 888-888-0919 or click the button below to get help.