How the new tax changes may affect your divorce
New changes in the federal tax law may have significant consequences for divorcing couples with regard to alimony or spousal maintenance.
Under current tax law, when one person pays alimony to the other person under a court order or by an agreement that was approved by the court, the paying party (the payor) can write off the alimony payments, which reduces the payor’s taxable income. The receiving party (the payee) must pay income taxes on the alimony payments as if it were income. This is called “income shifting.” As the payee is usually the lower earning party in a divorce, the alimony payments are taxed at a lower tax rate. Consequently the federal government has been losing tax money on these income-shifting situations
All of this changes as of Jan. 1 2019. As of that case for NEW cases, the payor cannot write off the alimony payments and the payee will not have to pay income taxes on the payments. For example, if Mary earns $200,000 annually, but pays alimony to Joe in the amount of $75,000 annually, under the current law Mary’s taxable income is reduced to $125,000, aside from any other deductions she may qualify for. Joe adds to his income the $75,000 he received in alimony. If his income was $50,000, he is actually paying income taxes on $125,000.
Under the new law, Mary cannot write off her payments to Joe, and Joe does not have to pay taxes on his receipt of alimony. Each party pays taxes on their income: Mary on $200,000 and Joe on $50,000.
The change in the law applies to cases started after the first of the year. The new law does notaffect cases that are over or cases that started before Jan. 1 2019 but have not been finished. However for those cases started but not finished, the parties can agree to use the old law or the new law.
The new law makes no changes to child support, meaning that any child support payments are not a write-off for the payor, nor does the payee pay any income taxes on the payments.
Even if a divorcing couple reaches a full agreement, it is not an effective court order until the judge signs the agreement. In some courts that could take up to six weeks for the courts to send the parties its approval of the agreement, thus granting the divorce.
If you are considering a divorce and alimony may be an issue, using mediation is a very cost effective and QUICK process to discuss and reach agreements on all of the issues in your case. Gaspar Mediation offers appointment times to fit your schedule and hourly rates that are budget-friendly. Call us at 978-566-0152.