The taxation of alimony will change drastically starting in 2019. Here’s what you need to know:
Any divorce agreement effective after Dec. 31, 2018 will be subject to new rules for alimony, namely:
That means that alimony will get much less affordable for those paying it, while those receiving alimony will not have to claim it as income.
Because a person paying alimony will no longer have a tax break, he or she may not be able to afford to pay as much. This can affect the amount an ex-spouse will receive. That means tax impacts are going to be even more important part of divorce negotiations.
It also means both alimony and child support will be taxed the same way in agreements signed after 2018 (i.e., neither are tax-deductible for the payer). So if you have children, you'll want to talk a tax professional to review how payments should be split between the two, depending on whether a divorce agreement is effective this year or later.
Remember, these new tax rules only affect divorce agreements completed in 2019. Agreements made before the end of this year or earlier won’t change. Also be aware that some states require a six-month (or longer) waiting period for couples to either file for divorce, or for a divorce to be finalized.
Divorce can be unpleasant and traumatic. But if it’s inevitable, you need to do two things:
Finally, for those getting married, it may make financial sense to create a prenuptial agreement laying how alimony would be handled in the event of divorce. Note that some state laws forbid any agreement in which spouses to waive the right to future alimony payments.
Call if you have any questions about alimony or other tax matters.
As always, feel free to pass this Tip along to friends, and reach out if you need help with your personal tax and finance situation.