If you are considering a divorce or in the process of negotiating a divorce, you need to be aware of the elimination of future tax deductions on alimony. Alimony is a court-ordered provision for support and maintenance of a spouse after separation or divorce. Alimony payments are made by the supporting spouse, (generally the breadwinner) to the dependent spouse. It may be paid out in a lump sum or over a period of years to help with the expense of splitting one household into two.
The new Tax Law will make alimony payments non-deductible for divorce agreements signed after 2018. As a result, it is likely to affect the size of future settlements. After all, if you are the payee, the tax deduction may have been a huge incentive to pay out more for your ex-spouse because the tax savings can be substantial. Now with this enticement gone, it makes payouts potentially more expensive to the payee, and many recipients of alimony may find decreasing payout settlements as a result of this new tax law.
Tax deductions will still be allowed for agreements signed before or in 2018. Any divorce settlement made after Dec. 31st, 2018, will not be allowed to deduct alimony payments. However, recipients of alimony payments no longer have to include them in taxable income as these payments will now be considered similar to child support in the eyes of the IRS.
Studies generated by the IRS and U.S. Treasury Department have shown a mismatch of what alimony taxpayers claim they paid is greater than the amount ex-spouses claim they received, and this may be the reason behind the push for reform. It certainly will help free the IRS from monitoring this large tax gap and greatly improve its strategy for dealing with the discrepancies.
So whether you are the spouse that has to pay out alimony or the recipient of alimony, knowing how this may affect your settlement going forward is in your best interest. Some may want to delay their divorces and others may want to sign as soon as possible. Do your homework and check with your tax professional and attorney. And be sure to factor in this new law when negotiating your divorce settlement.
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