Alimony, often called spousal support or maintenance, will change significantly in 2019. The new tax law will not allow alimony to be deductible by the payor or taxable to the recipient. Instead, income taxes on alimony payments will now be paid by the alimony payor, instead of the spouse receiving the alimony payment.
Under current laws, alimony is deductible for the spouse paying it and taxable for the spouse receiving it. This can benefit both parties because less money is paid in taxes overall. The payor spouse has more to give and the receiving spouse pays low taxes.
However, the policy tends to cause reporting issues. The payor ex-spouse can overstate the alimony amount he or she paid to increase tax deductions. Meanwhile, the recipient ex-spouses can understate the amount he or she received to pay less in taxes.
The change will tax the payor at a higher rate because of his or her higher income, instead of taxing the person receiving alimony at a lower tax rate because of his or her lower income. It is estimated that this will raise an additional $6.9 billion over the next decade for the government.
When should I finalize my divorce?
Each situation may be different. If you earn a higher income and suspect you may be responsible for alimony payment in your divorce, it’s best to complete the agreement before the end of the year.
Your alimony payments will remain deductible and this may even hold true if there are future modifications to your agreement.
If you believe you will likely need spousal support because your divorce, the change may or may not be beneficial. For example, non-working divorced spouses may no longer be eligible to make IRA/Roth IRA contributions. However, you will not need to pay taxes for the alimony payments you receive, which may save you money.
Contact a lawyer for advice
The best way to be prepared for your divorce is to contact an attorney for advice. An experienced family law lawyer can guide you through all of the different caveats that may influence your divorce, so that you are prepared to make the transition at the appropriate time.