A Big Change Arrives on January 1, 2019
By Virginia L Colin
Decisions about alimony, also known as spousal support, are sometimes hard to make. Nevertheless NOW, before the end of December 2018, is the time to make them if you are separating or divorcing. If you want the tax advantage often associated with alimony, you need to get your agreement about spousal support written and signed by both parties by Dec. 31, 2018.
Why does that matter? During 2018, we are still operating under the old rules about alimony. The person who pays alimony deducts it from the income on which he or she pays tax. For the person who receives alimony, it is taxable income. If the income levels of the two people differ significantly, they can shift taxable income from a higher tax bracket to a lower one.
By moving the income into a lower tax bracket, the separated or divorced couple gives less to the IRS and keeps more in the family. Keeping more in the family makes it possible for the payor to transfer more to the payee while losing little or nothing from the income s/he keeps. In mediation we often look at three or four different ways to share income as the parties figure out what will be best for their family.
If you don’t reach an agreement (or get a court order) by Dec. 31, you will probably give more to the IRS. That leaves less for you, your ex, and your kids. After January 1, alimony will be as child support is now — simply a transfer of funds from one household to the other, with no tax consequences. Most couples who first sign divorce or separation agreements that include alimony after December 31 will contribute more to the IRS than those who sign their agreements by the end of 2018.
For example, suppose Jamal is going to pay $30,000 per year in alimony to LaShon. Jamal is in the 35% tax bracket and LaShon is in the 12% tax bracket. As illustrated in the table below, under the old rules, Jamal would pay no tax on that $30,000 and LaShon would pay $3,600 in federal income tax. Under the new rules, Jamal would pay $10,500 in federal income tax and LaShon would pay no income tax. If Jamal and LaShon want to have more money for raising their kids, they will benefit from putting their spousal support agreement in writing by December 2018. The tax savings are almost $7,000 per year. If the family will be getting a tax benefit of $6,900 per year over the course of ten years of paying alimony, that turns into tax savings of $69,000!
Working with a mediator and/or lawyers, Jamal and LaShon can decide who gets how much of the family’s tax savings. They might, for example, decide to put all of it in a Section 529 account for their children’s educations.
If you are separating or divorcing and expect to pay or receive alimony, now is the time to work with a mediator. Depending on what jurisdiction you live in, it may already be too late to get a hearing and a court order about alimony in 2018.
What if you are already paying or receiving spousal support and want to change the amount after January 1? Which law will apply — old or new? If you already have an agreement or a spousal support order under the old rules, you may be able to continue under those terms, with the alimony payments deducted from the payor’s income and counted as taxable income for the recipient. Your new agreement or court order will need to explicitly state that spousal support will continue to be paid according to the provisions of the tax law that was in effect before and during 2018. The clause should be written carefully by a mediator or a lawyer.
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This article is provided for educational purposes. The author is neither a tax expert nor a lawyer. Nothing here should be construed as legal advice.
