Divorce after 2018 will face new tax rules on alimony payments

Divorces nationwide and in Missouri will see some significant changes in federal tax rules due to the recent 2017 Tax Reform Act. For a divorce after 2018, the longstanding rule that makes alimony deductible to the payer and reportable income to the recipient will be eliminated. The payment will no longer be deductible nor will it be reported as income. In practice, the rule as it now exists has been a secure and generally useful mainstay of divorce negotiations for as long as family law practitioners can remember.

Whether the change will be received with a positive response by divorce and family law attorneys remains to be tested. In the past, the deduction feature was a selling point for the higher income earner to agree to an alimony award because it gave desired tax relief to that party and allowed for taxable income to be spread to the lower income-earner, who was in a lower tax bracket. Consequently, many experts view the dramatic change to be a tax increase in general for those who get a divorce after 2018.

The overall result of the change for those negotiating divorces effective in 2019 will be for those who must pay alimony to fight for reduced amounts to pay. The lower-earning spouse will generally receive less in real money despite it not being taxable. Those in lower tax brackets often have not had to pay significant taxes on such income due to other deductions and credits.

Therefore, in general the effect in Missouri and nationwide will be to penalize the recipients of alimony by reducing the real amount that they would have received under the current rule. In addition, alimony recipients cannot after 2018 treat alimony as earned income that qualifies as a contribution to an IRA for retirement savings purposes. The precise impact of the new rules must be reviewed with one’s tax adviser and divorce attorney for accuracy and specific information based on one’s particular circumstances.

Source: boothbayregister.com, “2017 Tax Reform and the impact on Alimony decreed after 2018: Divorce is hard enough — don’t be blind-sided by this one!“, Sarah Ruef-Lindquist, May 9, 2018

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