How Alimony and Other Support Payments Will Be Treated on Your 2019 Tax Return
Alimony and other forms of support payments have been taxed in the exact same way for decades. But as of January 1, 2019, the old rules are being turned on their head. These changes are one of the last ones introduced by the Tax Cuts and Jobs Act to be implemented. (Most of the other changes to tax law were put into effect in 2018.) So, whether you’re already divorced, contemplating divorce, or are divorced and considering renegotiating your divorce agreement, there are a few things you ought to know. Here’s a quick look at how your alimony and support payments will be treated when you file your 2019 tax returns.
If You’re Making Payments
If you’re the one who is making alimony payments, or any other sort of support payment to an ex-spouse, then the taxes associated with those funds are your responsibility. In the past, the payee was able to write off any alimony or support payments and receive a tax deduction for whatever amount they were paying. This would reduce their taxable income, thereby reducing the amount they would pay in taxes.
However, for any divorce agreements that are finalized after January 1, 2019, the payee can no longer claim these support payments as a deduction. Those amounts must be included in your reported income, and you must pay taxes on the full amount as well.
If You’re Receiving Payments
If you were divorced this year, and you receive support payments from an ex, then you don’t have to worry about paying taxes on that income. Prior to the beginning of this year, any divorcee receiving alimony or support from an ex had to report and pay taxes on that income. Now, however, alimony and support payments are considered nontaxable income, so you can collect those payments without worrying about losing a portion of the support to taxes.
If You’re Already Divorced
If you were divorced prior to January 1, 2019, then your divorce agreement is grandfathered into the old tax laws. The payee of the alimony can still write off their support payments as a tax deduction, and the beneficiary will still need to report and pay taxes on that income. So long as your current divorce decree remains intact, you don’t have to worry about these new tax laws.
If You’re Renegotiating
If, for one reason or another, you are considering renegotiating your divorce agreement, it’s important that you ask an attorney how this will impact the taxation of your alimony and support payments. Should you renegotiate any significant portion of your current agreement, the law could consider the amended decree to be a brand new one. And, since it would be finalized after the implementation of the new tax law, it would be subject to that law. If this is not something you want, be sure to consider any renegotiations very carefully.
If You Have a Prenuptial or Postnuptial Agreement
If you have a prenuptial or postnuptial agreement with your spouse, it is a good idea to review those agreements now, even if you’re not currently considering a divorce. The way the new tax law is structured, it may influence or even nullify certain elements of your current contract. Take some time to sit down with a lawyer and determine what, if anything, is affected by these changes. If the impact is rather large, you may want to consider renegotiating the agreement.
What Does This Mean for Divorce Agreements?
Obviously, this change in tax law can have an enormous impact on the finances of both parties involved. The payee now shoulders the financial burden of paying the taxes on the funds they are sending to their ex, while the beneficiary receives income from their ex with no associated tax obligation. This may increase financial strain on payees.
As a result, many experts believe that divorce agreements will now include lower alimony and support payments, in order to offset the financial strain associated with paying taxes on funds being sent to a different household. So, if you’re considering a divorce, keep this in mind when discussing your alimony and support payments.
If you have any questions about this new tax law and how it impacts your alimony or other divorce support payments, please contact us. Or, if you are considering getting divorced, be sure to visit with one of our divorce attorneys for assistance regarding negotiating your alimony payments, as well as any other factors associated with your divorce case.