Tax Changes & Divorce
The biggest question is alimony and whether a divorced spouse can deduct spousal support in his or her taxes. The short answer is: after December 31, 2018, alimony will not be a write-off for the person paying it and there won’t be taxes due on the amount by the person receiving it.
For 75 years, alimony the opposite was true. The person paying it could legitimately deduct it from his or her taxes and the person receiving it had to treat it like income, and pay tax on it.
This may make some divorces messier. It used to be a bargaining tool that alimony was a write-off, helping to bring negotiations to a conclusive finish with that caveat. Without it, under the new tax code, many divorce attorneys are concerned that separating spouses might dig in and not find a way out of endless negotiations.
In 2000, there were some 2.32 million marriages in the United States and about 900,000 divorces. Both numbers have dropped slightly in the years since, with 2016 numbers looking to be around 2.8 million marriages and 750,000 divorces.
Existing alimony agreements are grandfathered in – so long as the divorce is final by December 31, 2018. What isn’t clear is if there is a modification to an existing alimony agreement after December 31, 2018, if the modification is subject to the new tax law of non-deductibility.
Another downside of the new code: spouses receiving alimony can’t contribute those dollars to a retirement account, since it needs to be taxed income going into retirement savings.
Will the new tax code be good for anyone? We’re just not sure. Before you divorce, spend time researching all the details you’ll be facing, by consulting with a certified financial divorce professional and see how the new laws will affect you. (I can recommend some really good ones!)