The last thing on your mind when going through a divorce should be tax implications. The old federal income tax treatment of alimony has been permanently repealed with no foreseeable future legislative change. The most apparent reason for this change is to increase the higher-earning spouse’s income (by not allowing the deduction), which will likely be subject to a higher tax rate and therefore generate greater tax revenue.
Here are a few changes that are important to know:
- Divorces finalized prior to January 1, 2019, will be grandfathered under the prior tax law and the payer will be able to keep the tax break (alimony deduction) and the payee will include the payments in their income.
- Both the payers and the recipients will see a big impact affecting their wallets.
- The payer will have a presumed higher tax-bracket, thereby losing a significant deduction and not being able to transfer a portion of his or her income tax to the presumed lower tax-bracket spouse.
- Because of the new tax law, it is projected that the overall amount of alimony paid to the recipient will be reduced, due to the higher taxation on the payers.
Some additional items to be considered are:
- The annual child tax credit has increased from $1,000 to $2,000, for the custodial parent.
- If you have a 529 Plan, you are now allowed to use these funds not only for college but also for elementary, middle and high school education up to $10,000 per year.
In light of these tax law changes, it is important to review your settlement agreement and if appropriate, consider modification of an existing agreement. For any questions and if you are interested in learning more about the tax implications of divorce, please contact us.