When you walk down the aisle and say “I do,” the idea of getting divorced may seem unlikely.
But if you do end up heading to a family court judge, exactly when you get your divorce finalized could have a big impact under the new tax plan.
San Jose State University professor Annette Nellen teaches finance and tax policy. She says if you are the higher earning spouse in a divorce, you should try to get your divorce finalized before the end of 2018. “So, if the amount is alimony then the spouse who is paying it actually gets to deduct it and then the spouse that is receiving it picks it up as income,” Nellen said.
But since the lower-earning spouse is likely in a lower tax bracket after a divorce, today’s arrangement usually means more money stays with the divorcing couple and does not go to Uncle Sam.
But starting in 2019, the alimony deduction will go away.
The higher earning spouse will pay all of the tax and the recipient will get the money tax-free. If you will be receiving alimony as part of a divorce, it may pay to delay finalizing your divorce for at least a year.
But, as usual, it is complicated.
“Most likely in the whole context of working out the divorce arrangement — property settlement, alimony, child support — the tax considerations today are factored in and they will be factored in under the new law as well and so perhaps less alimony would be paid,” Nellen said.
In 2015, the latest year for which the information is available, about 600,000 couples use the alimony deduction on their federal tax return.
In summary: Prior to the effective date on the new tax law, alimony or spousal maintenance, the person paying gets a tax deduction for the amount paid and the recipient includes the amount as income. Starting in 2019, the payor gets no deduction and the recipient does not include the amount as income.