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New tax law presents alimony uncertainty

Sunday, June 24, 2018

The recently-passed changes to federal tax law upturned the 75-year-old deduction for spousal support payments. The first steps at the beginning of the divorce process is preparing for the complications posed by this new law and its impact.

Beginning Jan. 1, 2019, alimony is no longer deductible to the payer and taxable as ordinary income to the payee under the Tax Cuts and Jobs Act. Guidelines and software used to calculate support payments by lawyers and judges in Texas and across the country will be outdated.

The tax break offered to a spouse was an incentive to solve divorce legal issues. The deduction also provided more money for alimony payments. Because of this change, divorce negotiations and proceedings can become more confrontational and complex.

Before this change, a household also received tax relief because the higher-paid earner and the spouse with the higher tax bill transferred income to the lower-paid spouse who usually had a lower tax rate. This helped separate households keep their expenses closer to the costs of operating a single household.

The alimony recipient, in addition to receiving less money, will face more difficulties contributing to an individual retirement account. This money may no longer go into an IRA because contributions usually must come from taxed income.

Eliminating this financial relief may also discourage divorce because couples may not afford divorce. Some spouses may stay together even though their marriage is unhappy or harming the family.

This has also caused confusion for existing divorce decrees. It is unclear whether modification of existing support agreements in 2019 will eliminate tax liability. The changes are also having some spouses rush through divorce in 2018 to receive the alimony deduction benefits.

A spouse should seek legal advice on this issue to make reasonable and sound decisions. An attorney can provide options and pursue a fair and reasonable decree.

Source: CNBC, "Loss of alimony tax break in GOP bill may add to the financial pain of divorce," By Annie Nova, Feb. 4, 2018

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