This month, we’ve talked about how the new tax law will affect most Americans, as well as some of the deductions that are changing or disappearing. But those who may be contemplating paying or receiving alimony can expect some major changes starting in 2019. Depending on your situation, there may be good reasons to either speed up your divorce proceedings or delay them until after the new rules take effect. I’ll explain why in a moment.
How Alimony Works Now
Under the current rules, a person who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction (a deduction that is available without itemizing). Also, alimony and separate maintenance payments are taxable to the spouse who is receiving the money as taxable income.
Under tax reform, the person who pays alimony will no longer be able to take a deduction, and the person who receives alimony can no longer count it as gross income. In other words, for divorces and legal separations taking place after Dec. 31, 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse won’t be able to include those payments in gross income or pay federal income tax on them.
It’s important to note that the new rules don’t apply to existing divorces and separations. Current rules continue to apply to already-existing divorces and separations, as well as divorces and separations executed before 2019.
Under a special rule, however, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree UNLESS the modification expressly provides that the new rules apply. This might make sense for situations in which a change in income levels exists for the person paying or receiving alimony.
Higher-earning spouses who are in divorce proceedings now have an incentive to wrap up their divorce settlements before Dec. 31, 2018, because alimony is still deductible for agreements reached this year. On the other hand, spouses who will be on the receiving end have an incentive to delay their agreements until 2019, because alimony payments received then would be tax-free.
If you are in a divorce or separation this year that involves alimony, consider consulting a financial adviser with experience in divorce-related tax issues to avoid being stuck with an expensive tax-related mistake. At AMDG Financial, we work with many individuals who find themselves in transition. As fee-only, fiduciary advisers, we believe tax planning should be part of a holistic financial plan, and we would welcome the opportunity to explore your options with you. Our process includes several complimentary meetings to determine whether we’re a fit for each other before you commit to working with us. Schedule an appointment to get started today.