Note: For more information on financial planning and divorce, see our latest report by behaviorist Sarah Newcomb, The Big Split: Minimizing Conflict in Divorce Financial Planning.
Q: Can I still deduct my maintenance payments?
A: The Tax Cuts and Jobs Act changed the taxation of alimony. However, if your alimony is part of a divorce settlement that was concluded before December 31, 2018, you will most likely not be affected by the new tax laws and you will still be able to deduct your alimony as an input tax deduction.
What is maintenance?
Maintenance or spousal maintenance is intended to mitigate the effects of the divorce on the lower-income spouse. The regular payments help the low-wage earner to maintain the standard of living that he was used to from marriage. Also, alimony payments are part of a divorce settlement and do not include voluntary payments or payments to maintain property, according to IRS Publication 504. Payments can be temporary or temporary or permanent, depending on the agreement.
Child support is not the same as child support. The tax laws regarding child benefit payments will not change: the payer cannot deduct the payments and are therefore not taxable for the recipient.
This is how it works (for decades): the ex-spouse who pays the alimony can deduct it from gross income to calculate their adjusted gross income. (However, instead of appearing on page 1 of Form 1040, as was the case in the past, the input tax deductions are now listed on a separate form called Appendix 1.) The recipient then pays tax on the maintenance received.
If you’ve been divorced before December 31, 2018 will not change the taxation of your maintenance payments in this and in the coming years (unless you decide to change the tax treatment of your existing divorce agreement).
However, if your divorce settlement has been negotiated in the past few weeks (or you have opted for the new tax treatment), after-tax support is paid in dollars and the recipient pays no tax on it.
In general, shifting the tax burden on the payer results in more money being paid in taxes overall. (The Joint Tax Committee estimates the change will be $ 6.9 billion over 10 years (If you and your ex-spouse are in the same tax bracket, your child support is likely not that significant.)
Here is an example. Let’s say an ex-spouse pays $ 1,000 a month from a higher-income ex. If the payer is in the 32% tax bracket, he or she can save $ 3,840 in tax by taking the $ 12,000 they paid withdraws. The recipient – say he or she is in the 22% tax bracket – then pays $ 2,640 in tax on the $ 12,000.
However, under the new rules, the higher-income spouse pays the full $ 3,840 in taxes. So the ex-spouses pay $ 1,200 more in taxes on $ 12,000 under the new rules ($ 3,840 – $ 2,640 = $ 1,200).
How will the new laws affect the payer?
This change increases the taxpayer’s taxable income, which could push him into a higher tax bracket. This could also affect the payer’s eligibility for other credits and deductions.
If the person liable for maintenance is a parent with custody, the new law could also mean that prospective students who apply for funding via the free application for federal study allowance are less available. (The form uses the previous year’s tax returns, so this only applies to students whose parents divorced in 2019 or later and who are seeking help for the 2021-22 school year.)
How do the new laws affect the recipient?
The main potential disadvantage for the recipient, in my opinion, is that the maintenance payer’s tax deduction has been in place for decades and was likely taken into account in determining the maintenance payment. Some divorce experts suggest that the abolition of the payer’s deduction in many future divorce settlements could result in lower alimony payments as more of the available money is used for taxes.
Another potential disadvantage for the recipient is that taxable alimony was viewed as qualifying income for making an IRA contribution and is unlikely to be covered by the new laws (although I have yet to see an IRS ruling on the matter).
However, one potential benefit is that because the maintenance is no longer taxable Income, the recipient may be entitled to additional tax credits that expire on certain dates adjusted gross income Swell. For example, it will be easier for the dependent to qualify for the newly expanded $ 2,000 partially refundable child loan and / or the non-eligible dependent dependent. (Eligibility for this is based on adjusted gross income.)
Another potential benefit is that if the recipient is a custodial parent, a potential student may also be able to receive more financial assistance as well as American Opportunity Tax Credit or Lifetime Learning Credit.