How the New Tax Law Affects Alimony

When you get married, the thought of getting divorced might seem unlikely.

However, if you wind up in front of the family court judge, the exact date your divorce is finalized might have a significant financial impact under a new tax plan.

Annette Nellen, a professor with San Jose State University, teaches tax policy and finance. According to Nellen, if you’re the higher earning partner within a divorce, it’s essential that you attempt to get your divorce finalized before January of 2019. Nellen adds that if the spouse paying the alimony gets a chance to deduct it, then the partner that’s receiving it will include it as income.

Because the lower earning partner is probably in a lower tax bracket after the divorce, today’s arrangement typically means more funds stay with the couple and don’t go to the government.

Starting in 2019, alimony deduction is going away.

The higher earning partner is going to pay all of the taxes on the alimony payments, and the recipient is going to receive the funds with no taxes due.

However, as usual, it’s complicated.

Nellen says that more than likely the elimination of the deduction will be accounted for when working through future divorce settlements, which may lead to less alimony paid.

In 2015, the most recent year in which the data was available, around 600,000 divorcing couples utilized the alimony deduction on their federal tax returns.

Conclusion

Before the effective date of the new tax law, the individual paying alimony can receive a tax deduction for the amount paid, and a recipient includes the amount as income on their tax return.  Beginning in 2019, the payor no longer receives a tax deduction for alimony, and the recipient will not include it as income on their tax return.

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