If you’re filling for divorce, you may want to hurry up your paperwork. That’s because a new tax law, affecting alimony payments, will go into effect this New Year’s Eve.
The law was finalized last year. Among other things, it removes alimony from the list of “tax-deductible” items from an individual’s income.
If you’re paying alimony, you will now also have to pay tax on it.
If you’re receiving alimony, you might receive a smaller amount – since your payment will be taxed at a higher tax bracket than the rest of your income.
Because of this, countless couples are rushing to their divorce lawyers this holiday season. Alimony agreements finalized before 2019 are exempt from the new law – so paperwork must be sorted out, long-buried negotiation points resurrected, and agreements signed before the holidays are over.
Why would President Trump inject such a grinch-like occasion into everyone’s Christmas? Unsurprisingly, the answer is financial.
The motive behind the bill
There are at least two reasons Trump signed the changes on alimony tax.
Increased tax revenue
First, the new law will result in a significant income increase for the federal government.
Previously, alimony payments were taxed on receipt. This means that they were generally taxed in a lower income bracket – at a lower rate.
With the new law, however, the tax paid on alimony will be at a higher percentage. This results in a larger sum to fund the government.
The new law didn’t cover alimony payments exclusively. Rather, it addressed a range of tax cuts and changes, from standard deductions to estate tax exemptions to businesses and healthcare. Some significant changes resulted in a cut to the government’s tax funds; the alimony law makes up for this lost income.
Decreased income tax fraud
Another reason the government is interested in removing the tax-deductible quality of alimony payments: income tax fraud.
Currently, reports from payers claim a total of $10 billion in non-taxable income sent in alimony payments in the US each year. However, recipients report significantly less than $10 billion as received, taxable income.
In fact, there may be as much as $1.7 billion missing from alimony payments over the course of five years.
Who’s lying to the IRS? It’s hard to tell. The new law, however, will remove the incentive to use alimony as an income tax escape by both parties.
The repercussions of the bill
Unfortunately, this bill benefits neither the alimony recipient nor the sender.
Whenever the government makes something tax-deductible – alimony, charity donations, work expenses, retirement fund contributions – individuals tend to spend money in that category. A chance to skip some taxes? Yes, please!
Because of this incentive, alimony recipients have traditionally enjoyed larger payouts.
Now, those paying alimony no longer have a motive for paying more than necessary. Those currently negotiating their alimony agreements may try to lower their payout amount using the tax law as an excuse: they’re paying more in taxes, so they’ll have less funding available for payments.
Though the new law exempts recipients from paying tax on alimony, it’s not favorable to them, either. Their payouts are now taxed in a higher bracket. Even if the alimony check remains the same percentage from 2018 to 2019, the amount will decrease. Merry Christmas.
A rush to file for divorce
Divorce proceedings are never an enjoyable experience. Understandably, they’re something most couples put off for months (or years) after separation. The arguments and emotional negotiations, the finality of signed paperwork, the grieving process – none of it is pleasant.
This tax law has forced many couples to see their lawyers mid-Christmas-shopping to make one final plea for alimony agreements. Thankfully, the law doesn’t require that the divorce be finalized before New Year’s; only the alimony agreement must be set in stone. Couples negotiating custody rights, property, and other details can wait to settle these items in the New Year.
Divorce paperwork is on no-one’s Christmas wish list. Nevertheless, if you’re going through a divorce, you should call your lawyer. Because you know what else isn’t on anyone’s Christmas wish list? Increased taxes.
Happy New Year, America.