If your divorce is not already finalized, you will probably be affected by the new laws which will change how alimony is taxed. Alimony, which is sometimes called spousal support, is a payment one spouse is sometimes ordered to pay the other spouse after divorce. Starting in 2019, alimony will no longer be tax-deductible for the payer or taxable for the receiver.
This tax change has caused many couples to rush to have their divorces finalized before the end of 2018, so the new laws will not apply. However, it will not be possible for every divorcing couple to meet this deadline, though this may not be a bad thing. A recent news article noted that the new tax laws do not have to have a negative effect on your divorce if you incorporate some clever planning on other areas of your finances.
Possible remedies for 2019’s alimony tax changes
Before you spend too much time worrying about the possible adverse effect alimony payments could have on your finances, it is important to look at the big picture. Calculate the overall effect of all the tax changes on your situation. This includes the cap on mortgage interest deductions and state and local income tax deductions, as well as the increase to the child tax credit.
Depending on the effect these changes create for your situation, you may decide its not worth fighting to keep the house, or you may determine that the negative effect of the alimony change is offset by the benefit you will receive from the child tax credit. Whatever your situation, you cannot expect to make the best decision for you if you fixate on the effects of only one of the tax changes.
You may also want to consider possible alternatives to alimony, such as a large one-time payment or payments for property division. With the tax changes to alimony, there will not be tax differences between alimony payments and division of property payments in most cases. However, there are still differences to the two types of payments if bankruptcy or wage garnishment every become necessary.
If you were not able to have your divorce finalized by the end of 2018, do not despair. With some creative and strategic planning, you will be able to work towards the best possible financial outcome in your divorce.