Are you expecting to benefit from a tax break on your alimony payments? Under new legislation, lawmakers have eradicated the deductions that apply to alimony payments made to ex-spouses.
For spouses who have already finalized their divorces -- and for those who finalize their divorces before Dec. 31, 2017 -- they will still be able to benefit from the tax break. However, for spouses who are currently in the midst of their divorce process, these changes could affect their ongoing negotiations.
Consider the tax implications of every divorce decision
Spouses must consider the tax implications of decisions made during divorce negotiations. During property division, a spouse needs to consider the true value of all property after subtracting any tax liabilities. A home that's worth 10 percent less than its purchase price will not have any capital gains taxes associated with it. Meanwhile, a home that's worth double its purchase price will have enormous capital gains taxes associated with it. As such, a piece of property valued at $100,000 may not be worth that value if a spouse needs to pay capital gains taxes when liquidating the property.
Similarly, taxes that apply to alimony payments -- whether it's a tax break received by the payer, or income taxes that the payee needs to make -- will affect the true value of the payments.
How the new law changes alimony and taxes
Under the previous alimony tax rules, the person who received the alimony was the one responsible for paying taxes on it. Meanwhile, the person who paid the alimony -- and could not benefit from the income -- didn't have to pay taxes on that income.
Experts agree that the alimony tax code changes will make spouses less willing to agree to pay alimony. Or, spouses may be less willing to pay as much in alimony.
The ability to deduct alimony payments from one's taxable income has long been used as a bonus point for negotiation in the past. Especially when it involves a lump-sum payment, the alimony tax deduction represented a significant benefit to those who have to pay a large amount of alimony at the conclusion of a divorce. The days of these tax breaks, however, are coming to an end for divorcees of the future.
Understand how the new law could affect your divorce
Couples who are in the midst of divorce proceedings right now need to understand how the new alimony tax deduction laws could affect their divorce negotiations. Do you need to change the way you're negotiating your current divorce? A complete knowledge of the new tax laws will help you answer this question.