Deduction of alimony ends soon for new divorces

One of the changes brought about in the recent tax reform act was the elimination of the ability to deduct alimony payments starting in 2019. Under current law, alimony payments are deductible by the payor and taxable to the payee. Alimony that is in effect, or goes into effect, by December 31, 2018 is grandfathered in and will remain deductible. Any divorce or separation agreements that include alimony that are signed after December 31, 2018 will no longer be allowed the benefit of alimony deduction.

In North Carolina, where you have to be separated for one year before you can divorce, a couple can nonetheless enter into a settlement agreement out of court and resolve all the issues that would otherwise be decided by a judge. Negotiating an agreement is usually faster, more affordable, more private, and takes less of an emotional toll on the whole family. Couples have a chance to be creative and find what works in their situation, rather than living with what a judge might order.

Working with a CDFA has the benefit of creating a cooperative situation where the couple can make decisions based on financial facts they both understand. Anyone who can benefit from the deductibility of alimony has a window to get a settlement agreement done NOW to take advantage of the current tax law.

I’ve provided an example below showing how more alimony could be paid while costing less. Instead of paying Uncle Sam, the dependent spouse benefits from tax savings. It’s a win-win for both sides!

Give me a call so we can start working out your settlement agreement before it’s too late!

Example of how alimony benefits both spouses

Example 1: No deduction of alimony. Dave’s ex-wife Judy has no income other than $30,000 in non-taxable alimony

Dave’s Income: $85,000

Standard Deduction: (12,000)

Taxable income $73,000

Federal tax $12,000

Income $85,000

Federal tax (12,000)

Alimony (30,000)

Net $43,000

Example 2: Alimony is deductible. Again Dave’s ex-wife Judy has no income other than alimony. In this example, we can see that Dave pay’s $5,000 more in alimony, but both Judy and Dave have more net income than in Example 1.

Dave Judy

Income: $85,000

Alimony (35,000) $35,000

Standard Deduction: (12,000) (12,000)

Taxable income $38,000 $23,000

Federal tax $ 4,370 $ 2,570

Income $85,000

Alimony (35,000) $35,000

Federal tax ( 4,370) ( 2,570)

Net $45,630 $32,430

Difference $ 2,630 $ 2,430