Last December, Congress passed the biggest tax law changes in 30 years, which will change the way we file our taxes for 2018. This week, we will discuss how the changes will affect people going through a divorce.
Since 1942, the person paying alimony got to take payments off of their income and the person receiving it had to declare alimony as income. This all will change with any divorce finalized on or after Jan. 1, 2019. After this date, neither party’s income will be adjusted for paying or receiving alimony.
Normally, the person paying alimony is the higher-income person. This means the government received less income tax. Also the change was reportedly made because many payers were over state payments made and many recipients were under reporting income received. This change may make many cases to be rushed to settlement because any domestic court orders before Jan. 1 will continue following the old rule. All old settlements are grandfathered.
This change will not necessary be a benefit to recipients because the payer will argue in court that he or she does not have the ability to pay as much because this income is taxable to them. This may reduce the size of alimony awards.
Another area where this change may cause concern is related to prenuptial agreements. Often, these agreements specified whether payments will be taxable or not. This might require some agreements to be renegotiated.
Child-support payments have never been treated the same way as alimony. It has never been taxable to the recipient or deductible to the payee. This did not change under the new tax law.
The new tax law may make it less desirable to receive the family home. You may be able to deduct all of the taxes and interest cost. New home equity lines of credit will not be deductible. People may negotiate harder for retirement assets.
With the lower income tax rates, it may make sense to take this qualified money and do a Roth conversion, which could provide tax-free income later in life.
There may be some negotiations about who gets to claim the children on their tax returns. Under the new law, personal exemptions no longer exist, but there is an increased child credit. Because a credit is a dollar-for-dollar reduction in taxes paid, this could be a valuable bargaining chip.
Remember, to take advantage of any of these changes or others in the tax code, you need to be proactive. Take steps before the end of the year to reduce your tax burden.
This has been a wild year in the stock market. You may have stock losses that you can sell to offset some winners. Depending on your income, you may want to bump the bracket to pull money out of qualified account at a lower rate or consider a Roth conversion.
Properly managing your tax bill can leave you with more disposable income to enjoy retirement. Remember, it is not what you earn that matters; it’s what you get to keep.
Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
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