While the majority of the Tax Cuts and Jobs Act went into effect at the beginning of 2018, certain laws pertaining to alimony and other forms of support payments after divorce were not implemented until January 1, 2019. If you were or will be divorced after that date, or if you were divorced prior to that date and are considering revising your divorce agreement, there are a few things you need to be aware of. Keep reading to learn how these new tax laws will impact your divorce support payments.
Who Pays Taxes on Alimony and Other Support?
In the past, the individual receiving alimony or other support payments was the one responsible for paying taxes on it. These payments were considered taxable income, and so the individual had to report it as such on their tax return, and pay the appropriate taxes on it.
On the other side of things, the person paying the alimony was able to write off those payments as a tax deduction. This reduced their overall taxable income by whatever amount they were paying to their ex-spouse.
However, as of January 1, 2019, this is being completely turned around. Now, alimony and income from other types of support payments are no longer considered to be taxable income. So, the beneficiary will not have to pay taxes on any funds received from an ex-spouse.
And, the individual making the alimony payments can no longer write off those payments as a tax deduction. This is obviously a large change, and shifts the tax responsibility from the recipient to the payee of the alimony.
Many analysts believe this will lead to smaller alimony and support settlements in divorce cases, in an effort to balance the scales, but it is extremely important that you are aware of this change when negotiating those terms, so you can ensure your settlement is fair to both parties.
What about Existing Divorce Decrees?
If you were divorced prior to the beginning of this year, then your settlement terms are grandfathered into the old tax law. (The payee can write off the support payments, while the recipient must report and pay taxes on any income from spousal support.) However, if you significantly revise your divorce agreement in a way that impacts those support terms, it is considered a new contract, and the new tax laws will apply.
So, if you are considering revising an existing divorce decree, it is advisable that you speak with an attorney and/or a professional accountant in Provo to determine how those changes could impact your taxes.
What about Pre- and Post-Nuptial Agreements?
If you have a pre- or post-nuptial agreement with your spouse, now is a good time to go over that contract with an attorney or financial consultant. These tax law changes could significantly impact or even nullify certain, common parts of these agreements, and you may want to renegotiate with these new laws in mind.
Note that having a pre- or post-nuptial agreement does not override the new tax laws. If you are not yet divorced, the changes brought on by the TCJA will apply to your divorce, regardless of what you and your spouse may have agreed to prior to their implementation.
If you have any questions or concerns about this new tax law, or how to handle alimony and support payments on your personal tax return, contact us to speak to a professional accountant in Provo and set up an appointment.