Important Changes to the Taxes on Your Alimony and Support Payments
As the year draws to a close, it’s important to start going over your tax documents and information now, so that you’re prepared for the coming tax season. But while you’re going over your own tax documents, don’t forget to familiarize yourself with any changes to tax law that may be pertinent to you. For example, did you know that the Tax Cuts and Jobs Act (which largely went into effect for the 2018 tax year) had another change that was implement just at the start of 2019? That change seriously impacts the way alimony and support payments are taxed, so if you make these payments to an ex, here’s what you need to know.
What Was the Law Before?
If you started making alimony and support payments in 2018 or earlier, then you’re likely familiar with how those payments were taxed. But here’s a quick recap, in case you need it: For decades, the individual making support payments was able to write off any support payments they were making as a tax deduction. This reduced their overall taxable income for the year, so that the owed less in taxes.
On the other side of the issue, the individual receiving support payments was required to report it as income, and had to pay taxes on it at their current tax rate. This placed the responsibility for the taxes on the payee, and removed it from the shoulders of the one making the payment.
What’s the New Law?
The new tax law relating to alimony and support payments has completely flipped the old tax law on its head. Now, the individual making the support payments is no longer permitted to write off the payments as a tax deduction. This means that they are required to pay taxes on the money, regardless of whether the payment is removed from their paycheck, or sent from their bank account.
The payee, on the other hand, no longer has to worry about paying taxes on the support payments they receive. Alimony and other support payments are now considered non-taxable income. So, regardless of how much your ex is sending you in support each month, that income cannot be taxed under the new law.
Who Does This Apply To?
Now, before you go and make sweeping changes to your taxes this year, it’s important to understand that this new law does not apply to everyone. In fact, if you were divorced in 2018 or earlier, your support payments are grandfathered in under the old tax laws; the payer can still write off the support payments, and the payee is still responsible for paying taxes on any support income they receive.
However, any divorce agreements that are established on or after January 1, 2019, will need to follow the new taxation laws in regards to alimony and support payments. Note that we said “divorce agreements” and not simply “new divorces.”
This means that, if you should choose to revisit your divorce agreement and renegotiate the terms, you may find yourself with a legally new divorce agreement, which would mean that the new tax laws apply to it. This is important to keep in mind if you decide to renegotiate any major terms on your existing divorce decree.
What about Pre- and Post-Nuptial Agreements?
If you have a pre- or post-nuptial agreement, this may be a good time to go over that contract with your spouse and an attorney or accountant. In some cases, these changes to tax law can significantly alter or even nullify parts of your existing contract. At the very least, you may want to reconsider and renegotiate any sections pertaining to alimony and support payments, with these new tax laws in mind.
How Will This Impact Your Taxes?
Any time there is a major change to a tax law that impacts you, it is a good idea to sit down with an experienced CPA and discuss how this impacts your tax return. So, if you were divorced this year, or you've renegotiated an existing divorce agreement this year, we invite you to contact one of our expert tax accountants to go over how this new law might impact your unique situation.
To schedule an appointment, simply give us a call or fill out the contact form on our website. We’d be happy to meet with you before tax season begins, so that you are armed with the knowledge and confidence to move forward with your tax return, regardless of these changes. Contact us today!
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174