Alimony tax laws (for spousal support) are changing.
The Basics of Alimony
Alimony payments are based on the earned income of the husband and wife individually. There is a formula that determines the amount the higher earner will pay the lower earner. It is an attempt to generally equalize earnings for both individuals and at the same time attempt to allow them both to continue to maintain a similar lifestyle to their pre-divorce situation. The key word is attempt. This is not always possible.
Pre-2018 Alimony Tax Laws
Before and during the divorce process any support received is generally not considered alimony. Therefore it is not claimed as income by the recipient or as a deduction by the payor. As with all tax laws, there are exceptions but these are very specific and they are not so common.
In many states payments to you can be termed unallocated support or “Pendente Lite” support (Latin for during the pendency of the divorce).
Whatever the name, it is not a tax consideration until after there is a written agreement or Court order, typically at the time the final divorce is entered with the Court. In other words, when beginning the day after the divorce, spousal support is taxed by the recipient and is a tax deduction by the payor.
Federal tax rules are very specific and can be found at: http://www.irs.gov/taxtopics/tc452.html
Advantages and Disadvantages of New Alimony Tax Laws
The new rules will not become effective until January 1, 2019, which leaves the current rules in effect for the balance of 2018. Because of this, divorce attorneys are seeing a surge of new clients attempting to complete their divorces before the end of this year. Here’s why.
Beginning on January 1, 2019, any divorce finalized will be subject to the new rules. They are advantageous to the recipient but a disadvantage to the payor.
Under the new rules, in 2019, the higher earner who is paying the alimony is no longer entitled to the long-standing tax deduction. This of course, increases their taxable income, and subsequently their federal income tax. At the same time, the recipient of the alimony no longer claims the support as income, which reduces that individual’s federal income tax.
Based on these facts alone, an onslaught of higher earners who have been considering divorce are racing to the finish line to get a final divorce by December 31, 2018 to keep their deduction.
There is Still Hope For the Payor After January 1, 2019
While for most people divorce is a highly charged emotional transition, it is more so the most important financial transaction you will ever make. There is no need to rush through for a deadline on a calendar. It is too easy to “just get it over with” and find that you have short changed yourself, or you have loose ends plaguing you for months, or even longer.
The entirety of your financial assets (including the support entitlement or requirement) are subject to negotiation. There are a number of financial strategies that can be used to sidestep many disadvantages and mold them into advantages. This requires a “big picture” analysis of entitlements, requirements, and more importantly your priorities. Once identified, delicate negotiations can be successfully accomplished, so the pieces of your future puzzle fall into place.
If you haven’t started your divorce, or are stuck…
keep in mind, you don’t have to do this alone.
So “how can you help me?” you ask.
My clients have found that starting with a list is the best method for getting and staying organized. We use my comprehensive Divorce Pre-Planning Checklist as step one in the Divorce Planning System.
We work through that together and from those personal details we are able to properly value your assets and prepare the negotiation strategies. This is all done BEFORE anything else. This process has also been successfully utilized when you’re stuck in the negotiation phase.
This process becomes your personalized Exit Strategy… and most importantly…
you are able to avoid most conflict, stress, and unwanted or unexpected surprises.
When you work with me, you have a guide and mentor every step of the way, and you never feel alone. I can work with you independently during mediation or with your attorney during a collaborative process. And together we can set you up for a soft landing.
Explore what your Exit Strategy could look like. Your only investment is your time.
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