As you most likely already know, as of January 2019, alimony laws are changing drastically. One might say the law about it has been turned upside down.
Since the Revenue Act of 1942, alimony has been a tax deduction for the payer and income to the payee. No longer.
Now and for the foreseeable future, in any divorce granted after January 1, 2019, the alimony payer will shoulder the tax burden. And the payee will no longer pay taxes on that income. So, we expect to see happy payees and unhappy payers.
Our gov expects an increase in tax revenue of more than $6 billion from the move. They base that on the fact that typically, the higher earner alimony payer will be liable for more in tax payments, compared to collecting from the alimony payee who typically earns less.
We unfortunately foresee alimony fights all over the country for high-income divorcing couples.
Those paying will try to pay as little as possible since they can no longer deduct it from their taxes. The payee might be the winner here since alimony is now tax-free income.
Experts say that the new tax law will most likely result in smaller alimony payments because payers will fight tooth and nail to pay as little as possible. But, in the end, it’s not up to the payee, but up to the judge presiding over the divorce. We’ll watch this issue with interest as it develops.
Furthermore, as if to add insult to injury, the legal fees paid to an attorney for securing alimony will no longer be tax deductible either.
DIVORCE ALREADY GRANTED?
Note that this new law does not affect alimony payments from divorces granted right up to December 31, 2018. Nothing will change for past divorces, only for divorces granted after January 1, 2019. That said, if you go back to court to have those alimony payments adjusted, you might well be subject to the new ruling.
WHAT ELSE IS CHANGING?
Besides the new alimony laws, the child tax credit is changing, and this could affect a divorce. It’s a concern. We can’t help wonder if fights over child custody and who gets the child credit will escalate given that the child tax credit is doubling! The 2017 tax reform bill is taking the child tax credit from $1000 to $2000 for every child under the age of 17.
Now, note that this is a credit, not a deduction. It means that, if say, you owe the gov $3000 in taxes for 2019 and you’re getting a credit of $2000 for your child of 17 years of age and under living in your household, you will write a check to Uncle Sam for $1000, not $3000.
And say you only owe the gov. $1500 in taxes, you’ll get your credit of $2000 against it. Yes, in this scenario, you’ll get a tax refund check for $500.
WHAT CAN YOU DO?
The best thing for you to do is to meet with your divorce attorney and CPA before you even go into the divorce negotiations.
Your divorce attorney can tell you what you’re most likely to be liable for, or receive, alimony-wise. She or he can also tell you how the child tax credit thing is likely to go.
If you’re sure you’ll be the payer of alimony, see if there is anyway you can offset alimony payments with property, or with say, a 401K or an IRA.
If you’re the payee, you might not want that because it means you’ll shoulder the tax burden on those accounts once retirement time comes around.
Of course, as we always say, figure out a way to compromise by entering a divorce mediation. This way, a solution or compromise might be found so that neither party suffers unduly.