New Tax Law Changes Alimony Calculation. Prepare Yourself.
Alimony payments are an essential part of a lesser-earning divorcee’s income. They offset expenses that paychecks can not cover, such as assets endowed to them through divorce. For pre-2019 agreements, these payments are tax-deductible for the payer, lowering his or her taxable income.
However, post-2018 agreements will see drastic changes about which some Floridians may have mixed feelings.
Upcoming Law Change
When the Tax Cuts and Jobs Act (TCJA) takes effect in January 2019, recipients will no longer deduct their alimony payments as taxable income. Payers will be hit hardest, since the tax savings realized by deducting alimony used to be substantial; moving forward, those payments could get more expensive by virtue of higher tax responsibility.
Although the TCJA is suspending this and other deductions, the standard deduction is increasing to $12,000 for single filers, $18,000 for head of household, and $24,000 for couples. For some alimony payers, this may equalize the absence of alimony payment deductions, with the possibility of a marginal tax break. However, if you itemize deductions and have dependents, this could increase tax liability – and your final bill.
Current Laws Regarding Deductible Alimony
The Internal Revenue Code supersedes what a divorce decree says in terms of pre-2019 alimony settlement deductibility. For alimony to be deductible from now until December 31, 2018, the following must apply in their entirety:
● Payments must be done in accordance with a written decree, such as dissolution of marriage or separate maintenance order;
● Funds must be made available to ex-spouse and not a third-party;
● Payment must be stated as “alimony”;
● Joint filing is prohibited, as is living with the alimony payer;
● Payments must be made in cash or its equivalent;
● The money cannot be classified as “for child support”;
● Payee must remit his or her social security number; and
● There can be no obligation to make payments to a deceased ex-spouse.
When the clock strikes midnight on January 1, however, the aforementioned will be moot.
Want a Full Year of Deductions?
Given this new law change, persons with irreconcilable differences who will be expected to pay alimony may want to have their dissolutions signed and filed no later than December 31, 2018. This would allow at least one full year of deductible payments since the decree will be signed under the old law.
Those who will receive alimony payments may want to put off filing until the law changes over since all monies paid will be tax-free. Remember, any pre-2019 payments that do not meet requirements above will be treated as child support or similar to the provisional process of divorce where assets are divided equitably.
It is worth noting that TCJA could be repealed in 2020, cutting over $26,000 over 10 years from households. As of today, it is uncertain if alimony tax payments could be affected in the event of a repeal. Right now, mixing other changes to tax law could end up leaving both parties with marginal benefits regardless if paying or receiving alimony.
It is important to contact an expert family law attorney who knows the TCJA, its applicability to your situation, and understands how parties can capitalize on filing either prior to, or shortly after, the new changes in January.