On behalf of Kaspar & Lugay LLP posted in blog on Wednesday, February 7, 2018.
If you have children and are thinking of filing for divorce, you'd be smart to do it now. Divorcing parents can deduct alimony payments through 2018. Under the new Tax Cuts and Jobs Act, the deduction will disappear in 2019, drastically affecting how alimony is handled in a parent's tax returns.
Enacted in 1942, the option to deduct alimony payments has long been an essential deduction for divorcing couples, especially those in higher tax brackets. For example, if a person who earns $250,000 is paying $4000 per month in support, they are really paying $3000 after the deduction.
While the new tax law also contains provisions for corporate entities and individual tax payers, the impact on divorcing couples will be staggering. Family lawyers across the nation are predicting a rise in bitter divorces, as couples head to divorce court to haggle over how much is owed to whom.
Take advantage of alimony deductions now
Until 2019, the person paying alimony will be able to deduct their payments while the person receiving the payment must report the payments as income.
If you want to take advantage of the alimony deduction before it disappears, here are some tips to keep in mind:
Specify alimony payments: When drafting your divorce agreement, clearly state in the agreement which payments will be considered alimony, as opposed to child support or division of property. Currently, only alimony is deductible from one's taxes.
Keep everything separate: Those seeking a divorce should file their income taxes separately and ensure that they have been living apart for at least six months. This is crucial for California residents, as there is a six-month cooling off period required before a divorce is finalized. This can affect California residents' eligibility to deduct, if the cooling off period extends into 2019.