Understanding Alimony Taxation Changes in the New Tax Law
The way alimony is taxed changed in the new tax law, affecting how it is accounted for both by those receiving and those paying. This article provides a detailed overview of the recent changes and their implications for individuals involved in divorce settlements.
Overview of Alimony Taxation
It's important to remember that while the changes seem new, they are actually effective from 2018 onwards. This means that for agreements signed or modified from January 1, 2018, alimony is no longer claimed as income by the recipient, nor is it deductible by the payer. However, agreements signed before this date continue to follow the old rules.
Impact on Divorce Settlements
The determination of alimony payments traditionally involves a significant amount of negotiation and legal maneuvering. One of the key factors in the amount of alimony paid is the fact that the recipient used to be able to claim the income, while the payer could deduct the payment. Lawyers typically take this and a multitude of other factors into account, sometimes discussing the amount of alimony for as long as they discuss a dime.
Revisions to the Tax Law
Under the new tax law, alimony paid by the payer is no longer deductible, and alimony received by the recipient is no longer taxable income. This rule only applies to new divorce settlements as specified. The IRS no longer needs to match alimony paid with alimony received, which means a reduction in record-keeping requirements for tax authorities.
Key Takeaways of the Change
The change also leads to a reduction in the obligation to pay alimony overall, as the tax benefit that the payer received is no longer available. This change can be interpreted as a 'hidden tax increase' because alimony is usually paid from the higher income earner to the lower income earner, and not allowing the payer to deduct that amount means the money is taxed at a higher rate when received.
It's crucial to understand that this information is provided for educational purposes and is not intended as tax or legal advice. For detailed and specific guidance, it’s essential to consult with a qualified tax professional or legal advisor.
Always keep in mind that the specific circumstances of each case will impact the outcomes and implications of these changes, and a thorough understanding of local tax and legal regulations is recommended.