- When the clock strikes midnight on January 1st, you can say goodbye to old alimony tax rules that have been in place for years.
- New rules mean that alimony payments are no longer tax deductible for the payer and taxable income for the payee.
- Even if you can’t file for your divorce before current alimony rules expire, taking other financial considerations into account can help boost your bottom line.
When the clock strikes midnight on January 1st, it will be out with the old and in with the new.
And this year, that includes the alimony tax rules that have been in place for more than 70 years.
Current rules state that alimony payments are tax deductible for the payer and taxable income for the payee. As of 2019, this is no longer the case.
But filing your divorce by December 31st is complicated.
That’s because, according to the American Academy of Matrimonial Lawyers, a child support agreement must be included in a final settlement or court order. Temporary agreements will not last.
For professionals working in this field, this means an especially busy time when trying to get divorces through before the deadline.
“For any marriage attorney or financial professional working in the field of divorce, now through the end of the year will likely be the most stressful and busy time of their career,” said Stacy Francis, board-certified financial planner and president and CEO by Francis Financial.
If you started your divorce proceedings towards the end of the year, you may already be too late.
“If someone filed for divorce in November, they’re not going to get a judgment this year,” said Anne Cochran Freeman, a partner at Sideman & Bancroft. “There are no rabbits that can be pulled out of a hat.”
But new alimony tax rules don’t have to be bad news for your divorce.
“[It’s] It’s not the end of the world,” said Megan Gorman, managing partner at Checkers Financial Management. “It gives us an opportunity to plan other areas of your finances if you’re going through a divorce.”
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The Tax Cuts and Employment Act introduced this year included other changes that could affect your divorce, namely home ownership and the way you claim your children.
Mortgage interest deductions are now limited to $750,000 — down from $1 million — if taken out after December 15, 2017.
And deductions from state and local income taxes — or SALT — are now capped at $10,000.
“If you’re going through a divorce and you’re thinking about keeping the house, you really need to evaluate whether you’re getting any tax benefits out of it,” Gorman said. “There will be people who get divorced who… maybe don’t find it that compelling anymore.”
If you decide to sell your home, you may be able to exclude up to $250,000 in capital gains if you are single and up to $500,000 if you are married and filing jointly. Those rules haven’t changed, Gorman noted.
The child tax credit has been raised to $2,000 per qualifying child under new rules – from $1,000. This credit expires for individuals earning more than $200,000 and for couples earning more than $400,000.
“If you have three kids under the age of 17 and you make $100,000 as a divorced spouse, that’s $6,000 in tax credits,” Gorman said. “That’s powerful.”
Rather than opting for traditional alimony payments, divorcing couples may wish to consider other payment methods.
Now that tax laws are changing, couples may want to consider wealth division payments instead of alimony, said Russ Thornton, financial advisor at Wealthcare for Women.
For example, if a couple is worth $1 million, they might choose to have one spouse pay the other $500,000 in multiple payments over time.
The division of property is typically a non-taxable event, Thornton said. From January 1st there will be no tax differences between alimony payments or split payments.
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However, there are some key differences between alimony payments and asset allocation.
For example, if your spouse files for bankruptcy, those split payments could go away, Thornton said. However, alimony payments are not deductible in the event of insolvency.
If your ex stops making payments, Thornton says their wages can be garnished up to 25 percent on property division compared to up to 50 percent on alimony.
Couples can also choose to make a large one-off payment in lieu of alimony, according to Gorman.
The arrangement usually eliminates any tension that ongoing child support payments can cause between a divorced couple.
And keeping your settlement drama-free can be the secret to saving money on your divorce.
“What we find in acrimonious divorces is that the harder both parties fight, the price of their divorce goes up,” Francis said. “It’s no surprise.”
To avoid this, try to put your emotions aside and have a clear picture of what you’ll have to live with after your divorce, she said.
Also, consider bringing in a neutral financial party, e.g. B. A certified divorce financial analyst who can help you make confident decisions about your financial settlement.
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