People who are in separation proceedings or contemplating a divorce must understand the effects of new tax law on alimony deductions. Essential time-sensitive decisions are necessary to consider to decrease the impact of changes in tax law. If a person is in a divorce proceeding or contemplating, it is essential to understand the effects of tax laws. Before changes in tax reforms, alimony payments were a part of the taxable income of recipient and permissible as a deduction from adaptable gross income (AGI) of the payer. Under Jobs Act and Tax Cuts, the payment of alimony made under separation agreements or divorce executed after 31 December 2018. The money will not be taxable to recipient or deductible by the payer.
Tax revenue may increase because the payer of alimony is presumably fallen in a higher tax bracket than the receiver of alimony. Under the old law, the benefits of tax for a taxpayer outweighed the tax paid by the recipient on alimony. The income is efficiently shifted from a high tax bracket to a low tax bracket. After the change in tax law, the alimony payer with high earning will not receive an alimony deduction, their taxable revenue will be more, and it is beneficial for the government. The latest law put payment of alimony in line along with pay for child support, from a perspective of tax treatment.
Numerous changes in tax reforms are operative as of 1st January 2018. The changes in the deductibility of alimony payment are operative for separation and divorce agreements executed later 31 December 2018.
What a couple should do?
In this situation, both spouses must work together for the execution of divorce agreement before 31 December 2018 so that the payer of alimony can deduct payment under the agreement. It may result in the best treatment for net-tax. There must be assets for the settlement negotiations of property. It is in the best interest of alimony payment, and both parties can share tax savings.
Individuals may get assistance to analyze FMV (fair market value) of matrimonial property and FMV (tax-effected) of these assets. This treatment is often overlooked and has a significant impact on the economics of property settlement. The same thing is happening with alimony payments. The agreements that are finalized after 31 December 2018 require alimony payer to negotiate a low amount to account for the difference in the treatment of taxes under the current act.
To understand new tax law on alimony deductions, here are some important considerations:
Necessities for Possible Deductible Alimony
Whether alimony payment is tax-deductible or not is strictly determined by IRS. A sum to be eligible for deductible alimony should meet the following requirements:
As per new tax law on alimony deductions, the separation or divorce instrument may not stipulate that a particular payment is not alimony because it is not deductible and will not be added in the gross income of payee. Keep it in mind that after legal separation or divorce, the ex-spouse can’t stay together in the same house or can’t file joint tax returns.