The new tax reform law took effect on January 1, 2018. For couples considering divorce, one change in particular might be of great interest: Alimony deductions will end.
Under the old tax law, the payer can deduct alimony payments will the payee must pay income taxes. The payer is typically in a higher tax bracket and enjoys the tax deduction. The recipient generally makes less money and is in a lower tax bracket, so less money is paid on taxes. That will change for divorces commencing after December 31, 2018.
Under the new tax law, alimony can no longer be deducted by the payer and the recipient does not have to pay taxes on the alimony they receive. This change will not impact current alimony agreements. However, it could provide incentive for divorcing couples to finalize their divorce before the end of 2018.
Currently, many divorce settlements factor in the alimony tax deductions and more money is allocated between the couple instead of going to taxes. The deductions make the payments more affordable to the payer and the recipient receives more money because the payer can claim the payments as a deduction. Under the new tax law that will change. While the recipient will no longer have to pay income taxes on alimony, they may get less alimony if the payer can no longer deduct the alimony payments.
The new tax law does not impact child support payments. Currently, child support payments are not tax deductible for the payer and not taxable for the recipient. However, one of the unintended consequences of the reform could be how child support is calculated to account for the alimony change.
The numbers are significant. More than 600,000 couples used the alimony tax deduction on their 2015 income taxes. If you are the higher earning spouse and will likely be paying alimony after your divorce, finalizing your divorce in 2018 may save you thousands of dollars.