While the law was passed in 2017 the changes take effect for tax year 2019. Alimony is a complicated subject in a Maryland divorce. Click here to read our post answering all of your questions about Alimony in a Maryland Divorce Case. This post just covers the new tax related changes.
Alimony & the Old Tax Code
Under the old tax code, alimony was taxable to the recipient, and deductible for the person paying it. So, the spouse getting alimony had to claim it on their taxes, and the spouse paying the alimony got a tax deduction.
This made sense if you realize that the spouse usually getting alimony is in a much lower tax bracket (or else they wouldn’t need alimony), and the spouse paying alimony was usually in a higher tax bracket. The extra tax hit on the alimony received by one spouse wasn’t that great. And the deduction could usually be quite valuable to the spouse paying alimony. This ultimately worked out well for the spouse receiving alimony!
How This Affected Divorce Cases
This tax provision allowed divorce attorneys to use alimony as a negotiating tool. Spouses paying alimony were willing to pay more alimony (since it was tax deductible) in exchange for something else they wanted in the divorce. The spouse receiving the alimony would usually get more alimony overall despite the fact they had to pay taxes on it.
All sorts of marital property could be traded back and forth because of these tax considerations – like mortgage interest or property taxes. Some of those deductions may have been very lucrative to the spouse in the higher tax bracket, and not nearly as much use to the spouse in the lower tax bracket. So, the lower tax bracket spouse could trade them away for more alimony.
Ultimately, this was another tool in the divorce attorney’s toolbox to negotiate a settlement of a pending divorce action.
This had been the law since 1942! So, the new tax law is quite a big change! But If you are already paying alimony take a deep breath. This new law applies to divorce agreements that are entered into after the New Year.
It looks like if you are already paying alimony pursuant to a divorce agreement entered into prior to January 1, 2019 the old rules will apply to you as long as you are paying alimony. But keep in mind that tax laws change. When we need tax advice we turn to a CPA. We hate to sound like a tv commercial but make sure you consult your tax advisor.
Alimony & the New Tax Code
In 2017, Congress did away with the deductibility of alimony altogether. That means it is no longer deductible for the person paying the alimony, and it will no longer be taxable income for the recipient of the alimony for divorces finalized after December 31, 2018.
At first glance, this may look like a win for the spouse receiving the alimony (since they no longer pay taxes on it). But in reality it may result in lower alimony payments. Since the spouse paying the alimony can no longer deduct it on their taxes they will end up with a bigger tax bill. Since the person receiving the alimony is usually in a lower tax bracket, this will mean more money for the government, and less money to be divided between the person paying and receiving the alimony.
As attorneys, we never like losing a tool to get the parties in a divorce to come to a settlement. A settlement of property issues in a divorce is usually in everyone’s best interests. Now it may be harder to do.
Those in favor of the change point out that logically, there is no reason to make alimony deductible from a tax law perspective. True. But we are divorce lawyers – not tax lawyers. This provision of the tax code had been deeply ingrained in the law for a long time and had become a favored tool in negotiating divorce settlements.
The politicians were unlikely to make a lot of people mad with this law. The law didn’t take effect for a whole year, and there are probably few people planning to get a divorce a whole year later!
The only group complaining about it was divorce attorneys. And let’s be honest, is anyone going to feel bad for divorce lawyers?
This change in the tax law regarding alimony will increase taxes on people getting divorced. Because of that, it may affect negotiations and make it harder to settle divorce cases.
For more on these changes see the post Big Changes for Divorce Decrees After 2018 from the CPA firm Murphy & Murhpy, CPA, LLC.
Discover what you need to know about divorce in Maryland. Click here to see our Free Legal Guide on Divorce and get answer to your questions today. And also find out what you need to know about child custody in Maryland by clicking here for our Free Legal Guide to child custody in Maryland.
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