Now that the calendar has officially turned to 2019, the Tax Cuts and Jobs Act of 2017 is in full effect. One of the more noteworthy items within the legislation was how it changed how alimony has been taxed for many years.
Under the old laws, which apply to any divorce agreements made on or before December 31, 2018, alimony payments were fully deductible by the person paying them and fully taxable for the person receiving them.
The new rules reverse the old. Now, for divorce agreements made on or after January 1, 2019, alimony is untaxed for the recipient and the tax break for the person paying alimony is revoked. The alimony paid to the recipient will still count as taxable income.
The initial evaluation of the new system was that alimony recipients were getting a much better deal, as they would essentially be getting free and untaxed income.
Further analysis reveals that these alimony changes are expected to increase revenue to the Internal Revenue Service by about $6.9 billion over the next 10 years. The tax liability is going to the higher-earning spouse and those payments are taxed at a higher rate than they would have been on the receiving side.
The arrangement also has its pitfalls for both sides, as it means there will be less money in the overall pot available for the parties to divide between themselves and, in turn, use to provide to their children.
There are additional ancillary effects, as well. For example, the tax break for alimony payers made for slightly easier negotiation during the divorce process. Now, negotiations surrounding alimony could become more contentious, as the price associated with paying alimony has gone up significantly for payers.
We are still in the early stages of this new alimony tax era, and it remains to be seen how these changes will fully affect divorce law. For the sound legal guidance you need when going through a divorce, consult a skilled Minnesota family law attorney with Appelhof, Pfeifer & Hart, P.A.
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