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:
- Alimony is no longer tax-deductible for the payer.
- Alimony is no longer taxed as income for the recipient.
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.
What the change means
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 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.
Helpful tips for handling alimony agreements
Divorce can be unpleasant and traumatic. But if it’s inevitable, you need to do two things:
- Consider alternatives to traditional alimony payments. This might include a different asset split, setting up an annuity or other ideas.
- Get tax help. Because these coming tax changes are so new and so drastic, taxes are going to be front and center in any negotiations with your spouse.
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.