Minimizing divorce taxes with out deducting alimony


It is never easy to balance family dynamics in a divorce. New laws have added an additional level of complexity. Prior to 2019, the alimony deduction had been a key strategy for divorce planning for over 70 years. The alimony payer, also known as alimony or spouse’s allowance, has deducted his payments and the recipient’s spouse has paid tax on them. This enabled divorced couples to shift taxable income from the spouse in a high tax bracket to the spouse who earns less in a lower tax bracket. The result was a valuable opportunity to save their entire tax burden and leave more money for the two households together.

Divorces completed prior to 2019 will retain this status for future payments. In the case of new divorces that were concluded after 2018, maintenance payments from the payer are no longer deductible and are no longer taxable for the recipient at the federal level. State taxes vary with some like California and New York allowing deductibility / tax liability while others like Illinois, Pennsylvania, and Tennessee aligning with the new federal non-deductibility. This non-deductibility makes the spouse’s benefit tax-neutral, as child benefit always has been.

At first, you might think that this is good news for the recipient. Unfortunately, in practice, the new law means that in most cases the payer owes more tax but pays less maintenance, and the recipient does not owe any tax on the payment but receives much less money. Both spouses will have to spend less after-tax cash.

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