Alimony breaks from tradition as new tax laws take effect 2019

THE WOODLANDS, Texas – It's not a pleasant topic, but it's one that is a fact of life for up to 50 percent of married Americans.

We're talking about divorce, and if it's something on your radar, you might want to get the wheels in motion before the end of 2018 as new laws regarding alimony come into effect January 2019.

Alimony is a court-ordered provision in which a spouse is awarded financial support after separation or divorce. In Texas, it's also known as "spousal maintenance."

Rhame & Gorrell Wealth Manager Kyle McClain said while child support is never deductible for tax purposes, alimony has historically been deducted from the payer's taxable income, and is taxable to the recipient.

That is now changing.

"Going forward, alimony payments will be non-deductible for the payer, and non-taxable for the recipient," McClain said. "This has some important tax ramifications for both parties to the divorce. Where the payer used to receive a tax deduction, they will not, starting in 2019. Where the recipient/payee used to have taxable income in the amount of the alimony payment, the money received will now be tax-free. This change may make coming to an agreement on alimony payments much more difficult for couples looking to split up. Alimony payers may now argue that they can only afford a lower payment because the tax benefit won’t be there."

For current divorcees, McClain said the deduction for the paying spouse is perceived as a bit of a consolation since a high earner in the 39.6 percent tax bracket paying $100,000 in alimony only takes an out-of-pocket hit of around $60,000. The alimony would then be taxed to the recipient spouse, usually at a much lower tax bracket.

McClain said the new law may also make it harder to contribute to retirement accounts such as IRAs for alimony recipients.

"Alimony received currently counts as 'earned income' according to the IRS, which is available for contributions to an IRA account. For divorce decrees modified or finalized after the cutoff date, this will no longer be the case," he said.

"Those who will be paying alimony would want to execute a divorce document before the end of the year to receive the favorable tax deduction going forward," McClain said. "Those who would be the recipient of alimony may want to delay until after Dec. 31, 2018 in order to get the benefit of the tax free payments."

Please note: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction.