If you’re considering a divorce, family law attorneys recommend acting quickly before new tax laws take effect in 2019.
You must file an agreement with the court by the first of October in order to get the agreement processed before new tax codes are enacted.
Under new tax laws, effective in 2019, alimony will no longer be tax deductible for the payer, and taxes don’t need to be paid on it by the recipient.
According to family law attorney Lauren Taylor here’s why. The IRS reports the number of people reporting deductions for alimony payments significantly outweighs the number of people paying taxes on the received alimony. In short, the government can’t reconcile the numbers.
Under the current code, a household’s income received tax relief through divorce because the higher-paid earner (typically, with the bigger tax bill), is transferring income to the lower-paid spouse, (who often has a less burdensome tax rate), according to CNBC. The current codes help both save money.
Lauren recommends couples finalize their agreements before the new law takes effect for two reasons. The law could lower alimony payments by up to 30 percent. And the payer won’t get the same tax breaks under the current law.
She recommends filing by October 1 in South Carolina.
“You have to wait 90 days from the date of filing before you can put an agreement on the record and have a judge finalize it,” she explained.
But that doesn’t mean the whole divorce has to be finalized.
“You can get the agreement approved and signed by a judge then wait another six months or nine months until your 365 has run up,” she explained. No fault divorces take a full year to be finalized.
Here’s how it may work, according to Tom Leustek with New Jersey Alimony Reform.
Current Tax Treatment: Spouse A now pays and deducts $30,000 a year in alimony. Spouse A’s income is federally taxed at 33 percent, so the deduction saves $9,900. Lower-earning Spouse B owes taxes on the alimony at a 15-percent rate, paying $4,500 instead of the $9,900 that would be due at Spouse A’s rate. The two have saved $5,400 between them, and the availability of the deduction to Spouse A makes more income available following the divorce.
Future Tax Treatment: Spouse A will pay $30,000 per year in alimony plus $9,000 in taxes. Spouse B will receive tax free income.
Critics of the tax changes argue the prayer will fight for lower alimony because they won’t receive tax breaks to offset the payments.
The law’s impact on child support isn’t clear.