Changes from the Tax Cuts and Jobs Act (TCJA), which passed in December 2017, are going into effect as 2019 begins. One of the most dramatic changes for divorcing couples is how alimony is treated at tax time.
For over 70 years, tax rules stipulated that alimony was taxable income for recipients and that payers could write off those dollars on their taxes. Now, the inverse will be true: Alimony payers will have to include payments in their income taxes, while recipients can write them off.
Other effects of the tax law
This impacts divorces finalized on or after January 1, 2019. However, previously finalized divorces could be impacted if they go through a modification. If the agreement states the modification will apply to the new rules, taxes would change, but if there is no language mentioning the new rules, the old rules would still apply.
Couples with pre- and post-nuptial agreements could be at risk as well, as the new rules could nullify several items in those agreements. An attorney can help review any documents to determine if they need updating.
There are a couple advantages divorced individuals may see in their taxes under the new rules. Single taxpayer deductions nearly doubled from $6,350 to $12,000.
And while the $4,050 exemption per dependent was eliminated, the child tax credit doubled from $1,000 to $2,000. However, that credit phases out for individuals earning over $200,000.
Managing the change
Couples who are concerned about the available finances for alimony can consider alternative forms of payment, such as property division payments or lump-sum payments. Family law attorneys can also help couples find creative solutions for amicable property division so each party has a positive post-divorce financial future.
The new tax rules don’t have to leave alimony payers with nothing. There are options couples can utilize to peacefully separate their assets under tax law and have a financially healthy single life.