Alimony tax deductions to be eradicated for post-2018 divorces

On behalf of Barli & Associates LLC posted in alimony on Friday, December 29, 2017.

Congress recently passed a massive tax update that will affect nearly every area of your financial life — even your divorce. One thing that changes for divorced spouses relates to alimony payments. Ex-spouses paying alimony have had the right to deduct those payments from their income taxes for the last 75 years, but now they won’t be able to deduct these payments anymore.

For spouses who divorce before 2019, these rules will not affect them, but spouses who divorce after Jan. 1, 2019, the new rules will apply. For divorces that happen before Dec. 31, 2018, spouses who receive alimony payments will need to pay taxes on it and spouses who pay alimony will be able to deduct it.

The issue could increase taxes for spouses paying alimony considerably. Imagine you’re earning at a specific tax bracket, but you pay part of your salary to your ex-spouse each month. Having the right to deduct these payments could serve to drop you down to a lower tax bracket — which might represent even more savings.

However, it seems that the Internal Revenue Service (IRS) has had trouble collecting money from the recipients of alimony. While the payers of alimony are quick to include those payments as a deduction on their taxes, the recipients of alimony — 98 percent of whom are women — are less prone to actually pay taxes on the money they receive. By requiring the payers of alimony to also pay income tax on the money, the IRS might be able to do a better job of collecting the tax money.

If you’re planning to divorce after 2018, and alimony payments are a concern, you might want consider the tax implications of your alimony payments. It will be important to keep this information in mind when you’re negotiating a divorce settlement.

Source: USA Today, “Exes and taxes: How the tax overhaul would alter alimony,” Jennifer Peltz, The Associated Press, Dec. 24, 2017