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Will Alimony Be Tax Deductible in 2019 and Beyond?

Are you wondering about the tax implications of alimony payments in 2019 and beyond? Navigating the complex waters of post-divorce finances can be challenging, especially when it comes to understanding how alimony impacts your taxes. In this article, we’ll shed light on the critical changes to the alimony tax rules and how they affect your Form 1040. Stay informed and prepared for your financial future with our clear, insightful guide on alimony and tax deductions!

Will Alimony Be Tax Deductible in 2019 and Beyond?

Alimony Tax Changes: What You Need to Know in 2019 and Beyond

This is a question that many people had been asking the attorneys with the Law Office of Bryan Fagan. Namely, whether or not alimony payments would be tax-deductible in 2019 and beyond. The Tax Cuts and Jobs Act, signed into law in December 2017, altered several aspects of our country’s tax laws, notably impacting alimony payments. A key change, effective from the 2019 tax year, is that alimony payments are no longer tax-deductible, and recipients no longer need to report them as income.

Are there exceptions to this rule?

Yes, the law does have exceptions. If your divorce agreement was finalized in 2018 or earlier, the old rules apply. Divorces completed after January 1, 2019, fall under the new regulations. Therefore, divorces finalized on December 31, 2018, or earlier, retain the previous tax structure, akin to those completed in earlier years like 2015, 2010, or 1995.

For these individuals, tax handling remains unchanged despite the new tax code. The paying or receiving spouse must still consider alimony as taxable and deductible, respectively.

How do you report alimony that you have already received?

If your divorce finalized before 2019, report alimony income as in previous years. Include the total maintenance received on your 1040. In Texas, two types of alimony exist: judge-ordered spousal maintenance and contractual alimony from mediation or settlement. Remember, temporary support during marriage doesn’t affect taxes.

Child support, while related to alimony, has distinct tax implications. Neither the payer nor the payee includes child support in their taxes, differing from alimony.

How do you report alimony that you have paid before 2019?

Will Alimony Be Tax Deductible in 2019 and Beyond?

Assuming that yours is a divorce that occurred before 2019, then you would deduct the payments of alimony made in those years just the same on your taxes moving forward. Paying alimony or spousal maintenance to your ex-spouse means that you would report that amount on your 1040 along with your ex-spouse’s Social Security number. This alerts the IRS to the fact that it was your ex-spouse who received the money. The IRS uses your provided information to cross-reference your ex-spouse’s tax return, ensuring they declare the income.

What are the requirements for deducting alimony payments?

As the spouse paying alimony, you must familiarize yourself with the rules for tax deductions. Notably, you cannot file a joint tax return with your ex-spouse, a clear requirement post-divorce. This rule also applies if you are still married but separated. Additionally, you must make alimony payments via check or money order. Payments in the form of stock, real property, or personal property do not qualify for tax deductions, as the IRS considers these as part of a property settlement.

Do the changing laws on alimony and taxes impact your retirement savings?

The recent shifts in alimony laws could significantly influence your retirement savings strategies. With changes effective post-December 31, 2018, it’s crucial to understand how these can affect your financial planning, especially if you’re involved in alimony or spousal maintenance transactions.

One critical update involves the possibility of transferring funds from your retirement accounts, such as an Individual Retirement Account (IRA), to fulfill alimony obligations. This approach may seem like a workaround to the new restrictions on tax deductions for alimony payers. Let’s break this down with an example: if you’re paying spousal maintenance through an IRA (specifically a traditional, non-Roth IRA), the money you transfer will be taxable upon withdrawal. Similarly, your ex-spouse will be taxed upon receiving these funds.

This method mirrors the pre-2019 tax structure for alimony, with a critical caveat: early withdrawals (before age 59.5) from an IRA attract penalties, potentially making this option less attractive. Moreover, if you’re considering a lump-sum transfer from an IRA for alimony, this needs to be clearly outlined in your divorce decree.

But is this the right move for you? Whether opting for monthly maintenance payments or a one-time IRA distribution at divorce, it’s essential to weigh your specific financial scenario. Consulting a financial planner is advisable to navigate these complex decisions. They can help assess whether this method aligns with your financial goals, or if alternative arrangements might be more beneficial for both you and your ex-spouse. Remember, what works for one may not necessarily be optimal for another in these nuanced financial decisions post-divorce.

Impacts of the new alimony rules on how you save for retirement

If you are to receive spousal maintenance or contractual alimony payments from your ex-spouse as a result of your divorce, then you need to be aware of how the new tax laws can impact how you can save for retirement.

Your ex-spouse’s money no longer qualifies as taxable earned income, so you cannot invest it in an IRA. If you are not working and only receiving spousal maintenance or contractual alimony for payment, this can seriously impact your options towards saving for retirement. There are other types of retirement accounts that you can save through, but an IRA is a tried and true method for those of us who earn an income we would like to invest part of.

Why could the changes in the law discourage you if you are the spouse who pays maintenance?

Law changes often bring unforeseen challenges, especially in family law. The recent modifications in alimony and spousal maintenance tax laws, intended to benefit ex-spouses financially, are making divorces more intricate. For divorces finalized after January 1, 2019, alimony payers can no longer deduct these payments from their taxes, while recipients don’t report them as income. This initially favorable change may not prove beneficial long-term.

The crux of the issue lies in the reduced financial pool available post-divorce due to the tax law alterations. This affects not just the immediate financial situation of the ex-spouse but also their ability to contribute to retirement plans like IRAs with alimony funds. In the long term, this could lead to financial uncertainty, especially for the receiving spouse.

Will Alimony Be Tax Deductible in 2019 and Beyond?

These tax changes could also shift the dynamics of divorce settlements. The challenge of presenting a financially favorable settlement could increase court-contested divorces over mediated resolutions. The complexities introduced by these tax adjustments extend to child support negotiations. Couples often discuss child support and spousal maintenance together, aiming to comprehensively address financial needs. However, the new tax implications can complicate this process, making it challenging to determine the appropriate levels of support.

In essence, while the tax law modifications on alimony payments aim to simplify financial obligations, they inadvertently introduce new layers of complexity in divorce proceedings. The long-term implications for both parties require careful consideration and expert financial guidance to navigate effectively.

Final thoughts on the tax changes to alimony and spousal maintenance payments

If you were undergoing divorce proceedings towards the end of 2018, finalizing your divorce by December 31, 2018, would have been advantageous. There are some benefits to having a post-2019 divorce decree if you are set to receive spousal maintenance or alimony payments. However, in some aspects, like retirement savings, these benefits may not exist. However, in some areas (retirement savings, for example), the benefit may not exist at all.

Having a family law attorney is essential for negotiating a divorce settlement that can be to your advantage from a financial perspective. Additionally, if you can speak to a financial planner, that would be a good thing, as well. Having someone in your corner to guide you from a legal and economic perspective can be the best of both worlds. When taxes get involved, it is a benefit to be able to rely on someone who is an expert in that area, as well.

Questions about divorce in Texas? Contact the Law Office of Bryan Fagan

If you have any questions about the material that we presented in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week here in our office. These consultations can be an excellent opportunity to ask questions and receive specific feedback about your circumstances. Thank you for joining us today on our blog, and we hope to see you again tomorrow as we post unique content for you to read through.

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