If you have been through a divorce, you have an idea of the processes you have to go through to get it finalized. Well, if you have no clue, divorce legally requires one spouse or ex-spouse to make payments to the other party. Since these payments are often considerable, locking in tax deductions for the paying party has often been a significant matter.
Well, with recent adjustments to specific laws, you may have heard that alimony payments under the newly implemented divorce provisions are no longer deductible for federal income tax purposes. The long-time deduction, which had been in place for nearly 75 years, was eradicated via one of the most contentious and well-publicized arrangements of the Tax Cuts and Jobs Act of 2017.
With the public and the family court paying so much attention to the loss of the federal deduction, there is a related issue that has received very little attention – alimony that, according to the Federal law, is no longer deductible, may still be deductible for state income tax objectives. So if you are seeking a divorce, this is a very crucial point, especially if you are in a high-tax jurisdiction where the state tax deduction has a more significant value.
Sometime back, the federal alimony deduction had been a staple in divorce planning. It permitted the payer to deduct his or her payments while the beneficiary paid income tax on the alimony received. The outcome allowed couples to divorce the chance to shift taxable income from the spouse with a more substantial salary to the one earning less.
The new law no eradicates deductions for alimony payments, meaning that the recipients will no longer have to include them in taxable income. Therefore, whether payments needed by Pre-2019 divorce agreements meet the requirements for tax-deductible alimony or not is strictly regulated by applying the Internal Revenue Code and related regulations. In a nutshell, what the divorce diktat declares and what the divorcing couple might envisage does not matter.
For a specific payment that’s needed by a Pre-2019 divorce contract to be eligible for deductible alimony, there needs to be:
- A written requirement,
- The payment must be made to or on behalf of the spouse or ex-spouse,
- The amount paid must not be stated not to be alimony,
- Ex-spouses should not live under the same roof or file jointly,
- To be deductible alimony, a payment must be made in cash or cash equivalent,
- The payee must provide his or her social security number,
- There are no legal obligations to continue paying after the recipient’s death,
- A payment cannot be categorized or deemed as child support under the alimony tax rules,
In spite of the loss of the federal alimony deduction, you might still be subject to the state deductible. Therefore, couples with prenuptial and postnuptial contracts, the probable effect of this significant law change remain to be seen. However, considering that these arrangements may have instituted alimony payments presuming the old tax treatment, the federal tax law modification may have implications even for those who are currently married.
In other words, with this new rule, alimony planning may have become less significant from a federal income tax standpoint, but it can still be quite vital from a state and local income tax outlook. It might also cause some people to overlook the tax angle altogether — a trap for the unsuspecting in states that still provide the deduction. With that in mind, most family law officials recommend couples to consult with their financial advisers or attorneys to see how this new law may impact their lives.
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