If you file for divorce in 2019, a new tax law will affect your divorce settlement. You may no longer deduct alimony payments from your income tax or report the payments as taxable income. This money also cannot be invested in an individual retirement account.
How will divorce agreements change?
Before 2019, people who made more than their spouses could deduct alimony payments from their income taxes. Those who received these payments had to report them as income and pay the applicable taxes. If your divorce was finalized before 2019, this change likely doesn't affect you.
Now, it can be considered the opposite. Essentially, what has changed is who pays taxes on alimony and when. This change significantly affects the person who pays alimony by removing the savings deduction from their taxes. It also removes the incentive to offer to pay alimony in the first place.
For those who receive alimony payments, it would mean each alimony check is "larger" because you will not have to pay taxes on it. However, as it is not taxable earned income, you cannot invest it in retirement accounts. This could affect your retirement planning.
Who will this affect?
Other than 2019 divorce filers, this change in tax law could disproportionately affect women and children. Women are typically the recipients of alimony in divorce cases as they typically do the following:
- Are homemakers
- Take on more child rearing duties
- Hold lower-paying jobs than their spouses
These factors could result in women facing harsher budgetary consequences if they do not receive alimony. Child rearing costs could instead be deferred with larger child support payments. However, there is no large-scale data available on this, as lawyers and the public have never dealt with this situation before. Only time will tell.
Divorcing couples will probably now focus on child support and co-parenting instead of alimony. The lower-earning spouse, however, may find it more difficult to get their feet under them while bearing more child rearing responsibilities. This change in the law marks the start of unmarked territory in the field of divorce tax law.