Determining a reasonable alimony amount can be quite a challenge for divorcing spouses and lawyers alike. But due to the new tax law, however, it will be even tougher due to the Tax Cuts and Jobs Act.
One provision scraps a 75-year-old tax deduction for alimony payments. The alimony deduction repeal would affect divorces carried out after December 31, 2018.
Under current law, alimony payments are tax-free for the paying spouse, and they’re taxed like regular income for the recipient. Since the latter typically makes less money, it keeps more money in the family unit and away from the federal government. Divorce attorneys use the current tax deduction as a way to reach a settlement easier since there was more money in the pot to divide amongst both parties.
By 2019, the spouse paying alimony cannot deduct it, and the spouse receiving the money no longer has to pay taxes on it. The IRS claims that 600,000 Americans claimed an alimony deduction on their 2015 tax returns.
Eliminating the deduction means less money to go around, which can make reaching a settlement much more difficult—meaning more litigation and more money in terms of legal fees. Furthermore, the consequences can also affect how property is divided and how child support is calculated. Couples working on prenuptial—and postnuptial—agreements should consider the tax law changes, since they contain clauses that typically been drafted assuming the tax deduction will be in place.
If you are interested in filing for divorce in Southern California, our Riverside County divorce lawyer at Hanson, Gorian, Bradford & Hanich are committed to helping you obtain the most favorable outcome in your divorce settlement. With more than 50 years of collective legal experience, we possess the necessary skill and history of success to find your solution.