The final version of the new alimony deduction tax plan is in effect. The new alimony deduction tax bill affects divorces carried out after December 31, 2018. The new rule won’t affect anyone already paying alimony.
This move makes ending marriages an even more drawn-out and expensive process, and could be particularly painful for lower-income couples.
This means big changes for divorce proceedings in the years ahead.
Prior to this going into effect — if you are paying your ex $3,000 a month in alimony – and your tax rate is 33%. The deduction benefit at tax time reduces your alimony payments to $2,000 a month.
For your ex, let’s say they are in the 15% tax bracket. The $3,000 check your ex receives is taxable income so after they pay $450 in taxes, their net payment is reduced to $2,550 per month. Ultimately, your ex is paying taxes, not you. You get the deduction benefit.
Under the change, you will no longer be able to deduct alimony payments. This could also increase your tax bracket. Overall, with the same alimony payments, it would cost you $2,550 per month instead of $2,000. An increase of $550 per month. Your ex would no longer pay taxes on the alimony – rather you will pay taxes, for them.
In this scenario, you would be paying an additional $100,000 over a 15 year period.
Under the new change, alimony agreements in place prior will be grandfathered as well as the tax benefit for the payor.
What is my current advice? If you are considering a divorce that would involve alimony – you should speak to an attorney to help make an educated decision, sooner than later.