On January 1, 2019, alimony payments will no longer be tax deductible. Likewise, under the new 2018 Tax Act, alimony will no longer be considered taxable income. Divorce support agreements executed before the end of 2018 are not affected by the new rule.
Alimony, or spousal support and maintenance typically becomes part of the divorce decree when one spouse cannot meet his or her living expenses without financial assistance from the spouse, who can afford to pay the alimony. The support is usually temporary, for example when the former spouse needs time to return to the job market or raise the children.
For couples becoming exes in 2019, divorce negotiations could become more complicated. There will be less incentive for the paying spouse to provide more alimony in anticipation of a tax break. According to some divorce experts, this could result in spouses having less money to live on. On the plus side, the recipient's income tax brackets will no longer be pushed upward by alimony income.
There are other tax-related downsides or potential benefits, where the expert advice of a tax attorney would be a definite plus.
Arguments for the new alimony tax rules are two-fold:
- Tax breaks for alimony amount to a "divorce subsidy." Besides, child support payments have never been subject to taxation.
- Researchers estimate that the new rule could, over the next ten years, increase federal revenues by $6.9 billion
- As described above, higher earning spouses could pay less to exes-about 10 to 15% of what was formely on the table because of tax deductibility.
- What does not go to the ex-spouse in the form of support payments, goes instead to the government as formely sheltered income is exposed to tax liability.
So, one thing the new Tax Act of 2018 did not do was simplify the code. A tax attorney can help you navigate the rules to transition between the old (2017) and the new (2018) rules. If you or someone you know is dealing with this transformation and don't know where to turn when filing or how to handle this tax matter, call Travis W. Watkins Tax Resolution and Accounting Firm at 800-721-7054. Take action today and stay on the right path with resources for the future!