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Divorce and Tax Treatment of Alimony

In divorce or dissolution of marriage cases, the tax treatment of alimony or spousal support changed radically at the end of 2018. These changes will affect all cases where alimony is agreed to, or ordered by the Family Court. Effective January 1, 2019, the changes to the tax treatment of alimony have turned upside down the historical tax treatment of alimony

Previously, alimony was a tax deduction, reducing taxable income for the payor. The receiving party was taxed on the alimony which was treated as income. Beginning in 2019, alimony payments are NOT a deduction for the payor and NOT taxable to the recipient. The change only applies into the future and does not affect the tax treatment of alimony for divorces that were final on or before December 31, 2018 or to individuals who have already been ordered to pay or receive alimony.

This of course means that payors will be liable for a lot more taxes. For example, if alimony payments are $1,000 per month or $12,000 per year, then at a highest marginal tax rate of 1/3 the payor will still owe $4,000 in taxes whereas if the divorce were final before December 31, 2018, the payor would have lowered taxable income by $12,000 and lowered the tax liability by $4,000. In this example, in 2019, the payor will be out of pocket $16,000 instead of less than $12,000 after any tax savings but, the government will have collected $4,000 instead of potentially nothing.

In general, paying alimony means that the court found an ability to pay (high income) and a corresponding need for alimony (low income). Payors usually pay a much higher rate of tax than recipients. This change will mean more money in the government coffers and less money in the pockets of families. This will probably have the effect of lowering alimony payments that parties are willing to agree to pay and that courts are willing to order.

Whether you are being asked to pay alimony or seeking alimony payments, you should have a lawyer to guide you through the process. Please click or call to hire a divorce lawyer. A consultation fee is charged in family matters.

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