If you’re seriously considering filing for divorce, you might want to do it before the year ends, depending on whether you will likely pay alimony or receive it.
Starting January 1, 2019, the Tax Cuts and Jobs Act—passed by Congress and signed into law by President Trump this past December—eliminates a 75-year-old tax deduction for alimony payments.
As of right now, if your divorce decree or separation documents are already finalized, the spouse who pays the alimony can deduct it from his/her taxes—which potentially lowers him/her into another tax bracket—and the person receiving the money must pay taxes on it as income. After December 31, 2018, the one who pays cannot deduct alimony and the one who receives no longer declares alimony as income.
For those who have been paying alimony—don’t worry. This law only affects divorces that are finalized at the beginning of next year. These individuals can continue to deduct their alimony payments from their annual taxes, and, the recipient spouse must still claim the payments as income.
Congressional tax writers support the change, stating that it is equitable for married people. The panel also argued that spousal support should be treated like child support, which already isn’t tax deductible for the payer or taxable for the recipient. According to the IRS, the new law will also add nearly $7 billion in tax revenue to the federal government in the next decade, which is equal to less than half a percent of the $1.5 trillion tax plan.
By contrast, divorce lawyers and experts forecast the change will have far-reaching implications. For instance, it will make negotiations for divorce settlements harder because the spouse with the alimony obligation will be motivated to pay less to offset the new, increased tax burden.
Some prenuptial agreements have alimony provisions that assume the tax deduction, which means those currently married and have such agreements need to rework it with the new tax plan in mind.
According to the U.S. Census Bureau statistics, 98 percent of the 243,000 people who received alimony payments last year were women. The IRS says 361,000 taxpayers claimed they paid a total of $9.6 billion in alimony in 2015, though only 178,000 reported receiving spousal maintenance.