Saturday 9th February 2019
The new tax law and maintenance changes are due to come into force this year. For couples who split up in the New Year, the divorce will be messier than ever. Under current alimony deduction practice (26 U.S. Code Section 71), the spouse paying the allowance may be deducted on filing taxes, while the receiving party pays tax based on their individual income. This particular law was made to save more money for the couple and to make it easier for the spouses to switch.
However, experts believe that this new tax law and alimony rule will discourage the spouse with a higher income. Hence, it wouldn’t be surprising if divorce cases got more complicated than they were before.
Basically, this new change will remove the incentive or “subsidy” that has been available for divorce for about 77 years. The government expects to benefit from this new law. However, divorced spouses will feel a great deal of resentment in response to this amendment.
The spouse paying the alimony will find that the amount is ineligible for tax deduction. On the other hand, the receiving spouse no longer has to pay tax on the maintenance payment. At first glance, this may seem good news for the receiving spouse, but it actually isn’t. This is because the total cash available to both spouses will undoubtedly shrink. Lower support therefore affects both the receiving spouse’s and the children’s lives.
Additionally, this new tax law and alimony rule will deprive the unemployed spouse of the ability to contribute to an IRA. Because the spouse no longer pays maintenance tax, they may not be eligible for a retirement plan. This can seriously affect the financial future of many spouses who receive maintenance.
Another reflection of this change will be seen in the number of cases going to court. With so much frustration and financial pressure, the chances of reaching an agreement are further reduced. This in turn increases the couples’ financial plight as they have to pay more for legal fees. Experts also believe that this change will make determining child support payments more complicated.
The new tax law and maintenance changes are an integral part of the law on tax cuts and employment. For couples who entered into a divorce agreement before December 31, 2018, nothing will change their existing agreement. Because of this, many couples rushed to finalize their divorce agreements towards the end of 2018.
If the spouse paying maintenance wants to pay through their retirement account, the receiving spouse would have to pay tax on the amount. This can be a way to replicate the same effect as before. However, the spouse would have to pay a lump sum. To find out what is the best way to go, keeping a finance professional helps the spouses a lot.