Come Jan. 1, the rules of the alimony game – in place for more than 70 years – will change.
The Tax Cut and Jobs Act, inked in 2017 and due to begin in 2019, changes the rules of alimony so that the amount paid for alimony will no longer be tax deductible and the amount received for alimony will no longer be taxable income. The move is expected to raise nearly $7 billion for the IRS in 10 years.
Disadvantage for those receiving alimony
While the amount received in alimony might become non-taxable, the most likely result is that the amount allotted in alimony will be considerably less, experts claim.
The 2010 Census shows that of 400,000 alimony recipients, 3 percent were men. That means the new rule will likely affect women, who are already at a disadvantage in a divorce. Research shows that income for women drops by more than 20 percent after a divorce. Research also shows that divorced women in Europe have a poverty rate of 27 percent, almost three times that of men.
People already divorced will be grandfathered in under the old rules but any modifications after Jan. 1, 2019 will be subject to the new rules. Prenuptial agreements inked before the tax deal was signed may be nullified, although this has yet to be definitively determined.
Other tax changes
The total tax equation is changing with different deductions for children and different standard tax deductions. Mortgage interest deductions are capped at a lower amount, as are deductions for local and state taxes paid.
A divorcing couple might consider lump-sum payments rather than monthly payments. They might consider a division of property rather than alimony, although any possibility of future bankruptcy could affect any property in the divorce settlement.
With the changes, financial experts say current divorce alimony settlements may need to be adjusted so that the amount left over after taxes, rent, alimony and other non-discretionary spending will not be vastly out of whack. The more paid each year in alimony, the more that these tax changes will affect the bottom line.