Thanks to the tax law passed by Congress and signed into law by the President in late 2017, we have a significant change coming to our law regarding alimony. What is the change, and why should you care? Before answering those questions, it is important to emphasize that if you are currently in a divorce, thinking of getting a divorce, or are already divorced and paying or receiving alimony, you need to keep reading.
Prior to the law change, any payment that met the legal guideline of alimony could be deducted by the payor on a pre-tax basis, usually resulting in $1 of alimony only costing the payor around $0.75 (depending on the payor’s tax bracket). The receiver of alimony would have to claim the payment as taxable income. This tax treatment frequently allowed the two parties to save a sizable amount of money in taxes, which would explain why the federal government decided to make a change.
Under the new law, any divorce judgment entered after January 1, 2019, in which alimony is payable, shall no longer be tax deductible to the payor and shall no longer be taxable to the payee. That means your divorce must be started and finished before the end of 2018. If you are not divorced by the end of 2018, you will not be able to save money on taxes through the payment of alimony. If your divorce was finalized prior to the end of 2018, you can continue to claim the tax benefits of alimony.
However, there is another issue with the new law that is extremely important to know. If you have an alimony obligation that is modified after December 31, 2018, whether by court Order or through consent, your alimony obligation will no longer be tax deductible by the payor and taxable to the payee. This is a serious change to the way we handle alimony modifications.
What does it all mean for you and your family? First, it means that you need to make some decisions within the next few months to ensure you are not left without options. Second, it means that you need to get the advice of experienced divorce attorneys to learn about your options. Call us at 732-384-1715 and schedule a consultation today with a member of our legal team.