Alimony payments have been tax deductible under the U.S. tax code for 75 years, but that rule is about to change. The Tax Cuts and Jobs Act, which was passed in 2017, made several changes to the tax law, one of which is making alimony payments taxable. This new rule will affect couples who have not finalized their divorce by the end of the year.
Alimony Under the Old Rule
It used to be that the paying spouse could deduct his or her alimony payments if the deduction was paid in cash, and the recipient spouse reports those payments as income. This often benefits the paying spouse who usually falls in a higher tax bracket than the recipient spouse. The recipient spouse in the lower tax bracket would then have to pay taxes on the alimony payments they received and reported.
Approximately 600,000 taxpayers claim this deduction each year, according to the Internal Revenue Service (IRS). If the paying spouse does not claim the alimony as a deduction, then the receiving spouse does not have to report it as income because the paying spouse is already paying taxes on that income. However, if the paying spouse does claim a deduction for the alimony, then the receiving spouse must include those payments in his or her overall taxable income.
Alimony Under the New Rule
Any divorces finalized after December 31, 2018 will be subject to the new rule, which does not allow deductions for alimony. Existing divorces and separations that are already finalized will not be affected by the new rule. Under the Act, alimony payments will be taxable to the ex-spouse making the payments.
Financial experts predict that individual retirement accounts may take a more prominent role in negotiations once the tax advantages of alimony are gone. One certified public accountant suggests that paying spouses can give recipient spouses an Individual Retirement Account (IRA) as a lump-sum form of alimony to retain some tax benefits.
Since the higher-earning spouse would have to report the IRA as income, he or she saves money by giving the recipient spouse the account. The transfer is not taxed, therefore the recipient, who is typically in a lower tax bracket, will not be immediately responsible for paying taxes on the account, but rather will only have to pay income tax once they take a distribution from the account. However, ex-spouses in need of immediate support may not benefit from this long-term strategy, especially if they are younger than 59 and a half years old. Those under this age may be assessed a 10 percent penalty from withdrawing from the account.
Baltimore County Alimony Lawyers at Huesman, Jones & Miles, LLC Help Clients with Alimony Options
If you are planning to get a divorce or you are currently in the process, there are several important things to consider of the new tax law regarding alimony. A knowledgeable Baltimore County alimony lawyer at Huesman, Jones & Miles, LLC can explain what the new rule means for you and what options you have going forward. Contact us online or call us at 443-589-0150 for a free consultation. With offices in Hunt Valley and Towson, Maryland, we serve clients throughout the surrounding areas, including Baltimore, Baltimore County, Bel Air, Columbia, Westminster, Essex, Monkton, Sparks, Parkton, Carroll County, Harford County, and Howard County.