Minimizing Taxes In Divorce Without The Alimony Deduction


Alimony is no longer tax deductible for new divorces. 


Balancing family dynamics when going through a divorce is never easy. New laws have added an additional layer of complexity.   Before 2019 the alimony deduction had been a key divorce planning strategy for over 70 years. The payor of alimony, also called maintenance or spousal support, deducted his or her payments and the recipient spouse paid tax on them. This allowed divorcing couples to shift taxable income from the breadwinning spouse in a high tax bracket to the spouse earning less in a lower tax bracket. The result was a valuable opportunity to save on their total tax bill leaving more money for the two households combined.

Divorces finalized prior to 2019 retain that status for future payments. But for new divorces finalized after 2018, alimony payments are no longer deductible by the payor nor taxable to the recipient at the federal level. States taxes will vary with some, like California and New York allowing deductibility/taxability while others such as Illinois, Pennsylvania and Tennessee align with the new federal non-deductibility. This non-deductibility makes spousal support tax neutral the way child support has always been.

At first one might think this is good news for the recipient. Unfortunately, the practical effect of the new law is that in most cases the payor will owe more taxes but pay less alimony and the recipient will not owe any tax on the payment but receive much less money. Both spouses will have less after-tax cash to spend.

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