Alimony, or spousal support, is a factor in many divorces in Providence, Rhode Island. The IRS shows that people received over $10.4 billion and paid over $12.6 billion in 2016. Until 2017, alimony was tax-deductible to the payer and taxable to the recipient.
Tax treatment of pre-2019 alimony
A person paying alimony under a separation or divorce agreement through the end of 2018 can deduct it from their taxes. Alimony deductions are even available to taxpayers who don’t itemize their deductions. People who receive alimony must pay taxes on it. A person can deduct or add alimony to income, but the amount depends on the individual’s tax bracket. Pre-2019 separation or divorce agreements allow alimony as an above-the-line deduction. This deduction reduces the adjusted gross income (AGI), and the IRS uses AGI for other purposes. An alimony payer can deduct more money in higher tax brackets. A recipient pays more taxes on alimony in lower tax brackets.
Alimony taxation changes in 2019
The 2019 Tax Cuts and Jobs Act affects all alimony from separation or divorce agreements on or after January 1, 2019. The payer can’t get deductions on alimony. The recipient doesn’t pay taxes on alimony. The new law expires after 2025. Lawmakers expect the changes to provide an extra $1 billion in revenue for the government. The changes may reduce the amount of underreporting of alimony paid.
What are the drawbacks?
Critics of the law changes see it as a tax increase for both parties. A payer in a higher tax bracket will pay the taxes. Without the deductions, a payer could move up a tax bracket, which leaves less money to divide. Divorce or separation agreements could calculate alimony by looking at the tax brackets instead of net taxable income.
The new system simplifies tax reporting for people but could complicate divorce. Parties to a divorce or separation will find it harder to lower their taxes to soften the blow. A payer that uses retirement money to pay alimony is using pretax money. The alimony recipient would have to pay those taxes. If the recipient is over age 59½, the 10% early withdrawal penalty doesn’t apply. The alimony changes could have significant effects on both people’s finances.
