While there is never a great time to divorce, there are financial considerations that could mean finalizing your divorce before the end of the year may be in your best interests. After 2018, spousal maintenance, commonly known as alimony, will not be tax deductible.
Why the alimony deduction matters
The person paying alimony can currently deduct it from his or her taxable income. The person receiving alimony must count it as taxable income. But here’s the important part: The deduction can result in lower net taxes for the payor and recipient. This is because the person paying the alimony can get a tax savings through the deduction that is greater than what the person receiving it must pay.
In other words, alimony could be used as a way to lower the overall tax burden on both exes, which is always a good thing when two people are stablishing separate households. Fewer taxes means a bigger pie to split.
An example can often help clarify in tax matters.
If a couple is currently divorcing, and one high-earning spouse agrees to pay $50,000 in alimony, that person’s deduction could, for example, save $20,000 in taxes. The person receiving the $50,000, however, may only have to pay $10,000 in tax. This reduces the overall tax burden by $10,000.
Alimony deduction ends in 2019
This deduction has been eliminated in 2019. That means for couples who are currently divorcing and for whom alimony is a possibility, it may make sense to get the divorce finalized prior to the end of the year. Spouses who divorce in 2018 can take the deduction indefinitely.
Of course, couples divorce for a variety of reasons, and for couples who don’t anticipate paying alimony, the urgency may not be there. However, if you are getting a divorce and alimony is being discussed, it makes a great deal of sense to discuss the benefits of finalizing the divorce in 2018 with your lawyer.