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Tax reform will change tax treatment of alimony paid and received

On behalf of Shelly McKeon
Some believe the amendment will make divorce negotiations more difficult as they concern alimony commitments.

One provision of the largely touted 2017 federal tax reform that people may not know about will bring a major change to the deductibility and taxation of alimony payments paid and received, respectively. The Tax Cuts and Jobs Act turns the 75-year practice of allowing paying ex-spouses to deduct alimony paid to former spouses as well as of the IRS taxing alimony received as income on its head.

Instead, for divorces finalized and divorce settlements signed beginning January 1, 2019, and thereafter, this arrangement will completely change. Payor spouses will no longer be allowed to deduct alimony paid on their federal returns. According to Inside Business, this will increase federal tax revenues about $6.9 billion in the first decade of the new practice.

While some may appreciate the attempt of Congress to offset tax cuts to others by finding other ways to increase revenue, many family law attorneys have stated in the media that they fear this will make divorce negotiations more contentious because paying spouses may be less generous knowing the potentially deep financial cost of losing the alimony deduction.

It may seem positive for the alimony recipient that he or she no longer must pay federal income tax on spousal support received in a tax year; however, some experts question whether the offset will be worth it given the likely hesitance of payors to err on the side of higher agreed-upon alimony levels.

Also, the assets and income that used to support one household will still need to support two after the divorce, and the tax law changes will make it more expensive for the paying spouse to spread his or her money to the other household. With the taxes now being paid at the payor’s typically higher tax rate, more money will end up with IRS and less funds will be available for the recipient.

In addition, because the majority of alimony recipients continue to be women despite advances in the workplace for females, many experts worry about the change hurting mothers and women in terms of their financial security heading into older age. In addition, if women have less money overall to work with, it could have a negative effect on household prosperity and on children.

Seek legal advice quickly

As of this writing in early November 2018, just under two months are left to try to finalize a divorce or enter into a settlement by December 31, 2018, which would prevent the arrangement from being controlled by the new law. Anyone in Maryland anticipating divorce should seek immediate advice from an attorney about whether this is possible and advisable.

The lawyers at The McKeon Law Firm in Gaithersburg and Bethesda, Maryland, represent spouses in divorce matters in the surrounding areas.

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