Alimony Is No Longer A Tax Shield
People who pay alimony are rarely grateful for the opportunity. However, it used to be that ex-spouses actually helped you out come tax time. When people who pay alimony to their exes, they can typically write it off as a tax deduction. On the other hand, those who received alimony had to report it as taxable income.
As of 2019, the whole ballgame changed! According to the IRS
“Alimony payments will fall under new tax rules starting in 2019. … Under the new regulations, the individual who pays alimony to an ex-spouse will no longer be able to deduct those payments. And the recipient of the money will no longer pay taxes on that income.”
Just when that seems to make sense, The IRS also has this to say about Alimony and Taxes.
“You can’t deduct alimony or separate maintenance payments made under a divorce or separation agreement (1) executed after 2018, or (2) executed before 2019 but later modified if the modification expressly states the repeal of the deduction for alimony payments applies to the modification. Alimony and separate maintenance payments you receive under such an agreement are not included in your gross income.”
Be sure your attorney is aware of this! Attorneys are not tax accountants (neither are we, so check with your accountant!).
Let’s assume that you are in a much higher tax bracket than your spouse. You will have paid a high tax on the money you send to your ex-spouse as alimony. It might be beneficial to see if there is “something else” of value, that is less than alimony + taxes, but more than the alimony that your spouse is looking for, that you can negotiate for in favor of alimony.
For instance, 2,000 a month in alimony, plus 37% tax will cost you $2,740 in pretax dollars. Your attorney will have some feeling of whether or not the judge is likely to award alimony. Let’s say that your attorney believes you are likely to have to pay “Bridge the Gap” alimony for up to 5 years. That amounts to $120,000 in after-tax dollars, but if you earn over $500,000 and your incremental tax rate is 37%, you would have to have earned $164,400 to pay that $120,000. Perhaps there is something your former spouse wants, that they would negotiate for not asking for alimony, as alimony, in this case, is going to cost you $44,000 more than what your ex is getting. The rest goes to the tax man!
It is always important to remember the tax man when negotiating your divorce, especially if this is a high asset divorce.
As always, every situation is unique. This series is intended to “start the thinking process” to take emotive choices out of a hard situation. Everyone’s situation is different, and this is not intended as legal advice. Please, speak to a divorce attorney prior to making any decisions, especially decisions based on a simple blog post. There are many mitigating factors that will go into the final divorce decree.
