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What to Know About Changes in Alimony Laws

Coming Changes in How the IRS Treats Alimony

Approximately 400,000 people per year receive alimony payments from their former spouses. Until the first day of 2019, alimony will continue to be treated as a tax deduction for the one who pays it and a source of income for the recipient. However, on January 1, 2019, this will no longer be the case.

Alimony Paid Will No Longer Be Tax-Deductible

Beginning on January 1, 2019, alimony payments will no longer be eligible for a tax deduction. If you are the one making the alimony payments, you are most likely in a higher tax bracket than your former spouse. Consequently, there is a general presumption that you would pay more tax on this money than your ex-partner would. Removing the deduction and shifting the tax burden to the one who makes the payments will most likely generate more receipts for the Internal Revenue Service.

The modification of the tax law could result in significant changes after it takes effect. In some cases, it might be possible to use money from a retirement account to make alimony payments. This could be a way to obtain some tax relief by meeting your alimony obligation with money that will be taxed in the future.

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Alimony Payments Received Will No Longer Be Considered Income

If you currently receive alimony, it is considered income that is to be reported on a tax return. If you’d prefer not to pay taxes on that cash this year, it can be used to fund an IRA or other retirement account. It can also be used to qualify for mortgages, home loans or credit cards. After the tax treatment of alimony changes, it may be necessary to find a job to fund a retirement account or obtain a qualifying income for a loan.

The Law Only Applies to Divorces Effective After 2018

The important thing to know about the new alimony rules is that they only apply to divorces finalized after the last day of 2018. Therefore, if you finalize your divorce at any point in 2018, alimony retains its current tax treatment. Furthermore, if your divorce was finalized at any point in the past, you will also receive the same tax treatment into 2019 and until the alimony period ends.

How Does the Change Impact Prenuptial Agreements?

It is unclear how the change will impact any prenuptial agreement that you have created with a spouse or future spouse. It may be a good idea to consult with a family law attorney who can review the agreement and analyze it in the context of future changes to the law. If necessary, now may be an ideal time to make changes to an existing agreement in order to protect yourself as tax laws are altered.

Make Sure That Payments Qualify as Alimony

Regardless of when your divorce takes place, it is important that any payments made or received qualify as alimony. Many general criteria need to be met. Payments made must be pursuant to a divorce decree or a separation agreement. They must also be made for the specific purpose of helping a former spouse maintain a reasonable standard of living.

If you are making or receiving an alimony payment, it cannot be given to or from someone who lives in the same household. Furthermore, you can’t file a joint return with the person from whom you receive or to whom you give spousal maintenance. Finally, the payment must be made in cash or a similar manner such as check or money order.

The IRS uses strict standards when determining if a person is entitled to special consideration regarding such a payment. These are unlikely to change going forward, so if you want your payments to qualify as alimony, it is important to understand the rules.

If you are looking for a family law attorney to advise you on these matters, contact Stewart Law PLLC at (281) 420-8020 at our practice in Baytown.

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