For decades, alimony payments have been tax deductible for the payor and taxable income for the payee. As of Jan. 1, 2019, however, the Tax Cuts and Jobs Act will change this. Alimony will no longer be considered tax deductible to the payor starting in the new year.
While those who have already ended their marriages don’t have to worry about the change, it will impact new divorcees. Instead of alimony payments, some couples may consider a division of property instead, which is not a taxable event. Under this arrangement, the marital estate is divided in half with one partner receiving their half of the estate in yearly payments over time.
The Tax Cuts and Jobs Act made other changes to tax laws relating to mortgage interest deductions and child tax credits that couples should consider when finalizing their divorces. Under the Act, mortgage interest deductions are capped at $750,000, which may reduce any advantages to keeping the family home. Also, the child tax credit has been doubled to $2,000 per qualifying child for individuals earning less than $200,000 per year, making child custody a matter that should be considered carefully from a tax standpoint.
Some spouses are rushing to finalize their divorces before the new laws go into effect. However, couples who filed for divorce too late in the year may have to rethink their settlements to account for the changes to the tax law. The changes to the tax law as it affects divorcing couples are complex. With careful planning and a knowledgeable divorce attorney, however, the new changes to tax laws do not have to impact divorcing couples negatively.