I thought maintenance was no longer taxable. I just received an email from my ex “reminding” me to put money aside to pay my estimated taxes related to the alimony I receive. Our divorce was finalized in May and we have agreed that maintenance will start on September 1st of this year as my employment contract expired on August 31st.
I thought I understood the tax law changes, but his email makes me question my deal. Is my alimony really taxable? Are there any other tax issues that I overlooked while negotiating my contract?
Alimony was the big change everyone was talking about when the Tax Cuts and Jobs Act went into effect. What was not discussed is that the taxation of alimony at the state level may not have changed. Some states are following the example of the federal government. Massachusetts is not one of those states. In order for the maintenance to be a completely tax-free operation, the parties must expressly state in the agreement that the maintenance is not a taxable operation. Otherwise, it will continue to be assumed that the payer will be able to deduct the alimony paid upon return to Massachusetts and the recipient must continue to declare the income upon return to Massachusetts.
Another common problem with couple divorce is mortgage interest deductibility, especially on a refinance. Prior to the TCJA, you could deduct interest on mortgages up to $ 1 million and home debt up to $ 100,000. As of January 1, 2019, you can only deduct mortgage interest up to $ 750,000. Also, unless you can show that it was used to buy, build, or improve the home, interest on home equity is no longer deductible. Mortgages and home equity loans that existed as of December 14, 2017 are still deductible as they were before the TCJA came into force.
People often put clauses in their contracts that one party will refinance the mortgage and the other will buy it out. If the new mortgage is under $ 750,000, this is not a problem. However, if the new mortgage exceeds this amount, interest on the loan above the $ 750,000 mark will no longer be deductible. While $ 750,000 sounds like a huge number given the cost of housing in the Northeast, it actually affects a lot of people.
One last tip that many don’t know, with the exception of the maintenance requirements, most changes for most taxpayers will expire after the 2025 tax year.
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