Money Matters: Year-end divorce deadline?

December 7, 2018 11:00

Sponsored by NEFE

The approach of the new year is always a time to reflect on what’s ahead and to set goals and resolutions for starting fresh in the new year. This year, more couples may be freshly divorced come January 1.

Why the year-end run on finalizing divorces – or putting them off?

Currently, recipients of alimony payments are liable for income tax on that money, while the payers can deduct that amount.

But, for divorces finalized after December 31, 2018, that will change. Alimony payments will no longer be tax deductible for the payer, or considered taxable income for the recipient.

Spouses who would be responsible for paying alimony can only take advantage of the current tax deduction if their divorces are finalized before the end of the year, while spouses who would receive alimony have an advantage if the divorce is executed in 2019.

Of course, as with much of tax law, there are caveats. Personal finance reporters can dig deeper into the specific requirements for alimony payments to be considered deductible under the current tax provisions – they must be cash or cash equivalent, for example.

The rules for alimony payments of different types, like lump sums or IRAs, are different.

There are other considerations for couples in the process of divorce, too; legal expenses related to divorce won’t be tax deductible in 2019 either.

And walking through an example shows that, under the new law, the divorced spouses likely pay more overall in taxes, with the tax burden falling on the higher-income spouse.

What could the longer-term implications of these changes be? In 2019, higher-income spouses – in the majority of cases, husbands – will fight harder for lower alimony payments.
 
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