Our discussion of asset division and taxes last week may have raised some additional tax-related questions for our Boulder County readers. Of course, major new tax legislation has gone into effect as of the first of January. One component of that legislation will have a major impact on anyone paying, and even potentially receiving spousal support.
For the last 75 years, divorced spouses paying alimony to their former partners have been able to deduct those payments from their income when preparing their tax returns. The reasoning behind this deduction was that it would (ideally) facilitate greater amounts of spousal support, making divorce settlements perhaps, much easier to reach. And, the payments themselves would help the receiving partner become established independently from the marriage.
The recently-passed tax overhaul does away with the alimony deduction, beginning in 2019. Advocates of repealing the deduction argued that alimony should be treated the same as child support (which is not tax-deductible), and the deduction put married couples at a disadvantage. The change will not apply to alimony agreements currently in place, and it will not apply to divorces finalized in 2018.
The change in the tax treatment of alimony has the potential to significantly alter a divorcing couple’s financial landscape. Whether a divorce is finalized in 2018 or 2019 will need to be taken into consideration to ensure spousal support payments work out the way all parties intend and understand. A legal professional can help with planning for alimony, as well as seeking a modification if unexpected tax consequences were not factored into the equation.
Source: USA Today, “Exes and taxes: How the tax overhaul would alter alimony,” Jennifer Peltz, Dec. 24, 2017