During the last month of 2018, lawyers and divorcees scrambled to get together alimony agreements before the Tax Cut and New Jobs Act took effect this month. Why would 2019 bring such considerable changes to divorce?
The new tax rules have significant implications for alimony payments across the country. If couples did not finalize the terms of their divorce by December 31, 2018, they are going to go through huge changes in filing their taxes this year.
What to know about taxes and alimony
Before the act passed last December, high-earning spouses could deduct alimony payments from their tax filing and then whoever received the payments include it in their taxable gross income.
After the act takes effect, alimony payments will no longer be classified as a deductible expense for the higher-earning spouse. Many legal experts predict the ramifications of the new tax act will result in fewer spouses fulfilling their alimony payments and putting all their extra cash towards child support or other expenses.
According to one expert, spouses typically split support payments between alimony and child support – putting more into maintenance to receive a better tax credit. She suggested that payers will now try to focus more on child support and less on alimony.
The expert went on to suggest there was little incentive to pay alimony now, since it will all be just considered money out of their pocket.
The new federal act impacts every state, despite differences in state laws. For example, Minnesota is an equitable distribution state, so all the marital property will be divided “fairly” instead of “equally.” The property often includes all shared bank accounts, retirement benefits and investment portfolios.
If a high-income spouse ends up losing a large share of their finances and paying alimony, the new tax rules may influence how they approach future payments.
With the constant changes in tax rules, it’s a smart move to consult a financial advisor before hitting the courtroom with your spouse. It will prepare you for any surprises or future tax filings after finalizing the divorce.