As we’re still lingering around the holiday season, forgive us for this post on a most not-joyous subject. However, we need to talk about divorce and some key changes coming down the pike come January 1, 2019. These changes affect people who are in the middle of a divorce and not those who have already gone through a divorce. Specifically, they pertain to taxes. Let’s examine:
Essentially, if your divorce was not finalized before January 1, 2019, then any ex-spouse paying alimony will not be able to deduct said payments from their taxes. For some exes, especially those who expect to be paying little in alimony, this is no big deal. However, for those that expect to be paying tens of thousands of dollars in alimony, that’s a huge chunk that could be deducted from one’s taxable income if the divorce is finalized in time.
Think of it like this: If an ex-spouse was expecting to pay $20,000 per year of his or her income on alimony payments, the ex-spouse essentially won’t be taxed on that income that they’re paying away under the current terms. But when the new laws take effect, they’ll be paying taxes on the income designated for alimony payments.
Currently, alimony is what’s considered an “above the line” tax deduction, meaning it’s available for even people who don’t itemize. It’s been in effect like this for several decades (70 years to be exact), but that’s going away this year. This could mean paying several thousand more dollars in taxes.
Here’s where things get really dicey, however. While there was an incentive for ex-spouses paying alimony to settle before 2019, there’s more incentive for ex-spouses receiving alimony to settle after the New Year. That’s because ex-spouses currently have to claim alimony payments as taxable income. However, after the New Year, alimony payments from settled divorces won’t be considered taxable income and will essentially be tax free money. It’s adding a whole new wrinkle to negotiations now, and the new tax law is going to add a whole new wrinkle to negotiations after the New Year as well.
Let us repeat that these new tax rules regarding alimony only apply to couples that settle their divorces in the New Year. So, if your divorce has already been finalized prior to 2019 and alimony is involved, there is no impact on your tax situation. When it comes to negotiating alimony payments in the New Year, however, there are several routes that people can opt to take to ease some of the burden from the new tax structure. Here’s a look:
- Negotiate based on the new tax law: If an ex-spouse was set to pay $2,000 per month on alimony, perhaps that number is negotiated down to the $1,600 range in 2019 to account for the changes in tax law.
- Alternative payments: Instead of alimony payments, one option is to proactively allocate money in the way of property or other measures. Doing so would avoid the tax implications that are soon to come with alimony payments. Under most circumstances, property division is considered non-taxable.
- Keep it friendly: This is easier said than done, but the longer a divorce drags out, the more expensive it usually becomes. Keeping things friendly and civil almost always results in a faster, cheaper overall divorce. Alimony payments may still be there to be had, but the savings in court and lawyer fees can be significant.
Let us once again be clear that the alimony changes only apply to divorces settled after January 1, 2019. Anything settled before then is exempt from the new tax law. But while the “d” word isn’t exactly joyous, it’s important to plan for and anticipate such changes if you could be affected.
Regards,
Ethan Warrick
Editor
Wealth Authority
