As 2019 begins, significant changes to alimony rules will go into effect. The new rules, as covered by Forbes and other publications, will change how divorced couples pay taxes on alimony. There are also substantial changes to the child tax deduction that impacts divorcing couples with children. People who are considering divorce or are already in the process of divorcing should be aware of the changes to fully comprehend the law during the divorce process.
What Are the Divorce Tax Law Changes?
The divorce tax law changes affect how the federal government treats alimony payments as income for taxation. For new divorces and new alimony orders, alimony is no longer deductible from income for tax purposes by the person who pays alimony. Instead, the party paying alimony must pay taxes on the alimony payments as though it is their income.
Conversely, the person receiving alimony no longer has to claim alimony payments that they receive as a part of their income. Instead, they are free to accept the payments tax-free.
Although the new rule lowers the tax burden for the recipient parent, the new alimony tax law likely raises the total tax burden for the two parties combined. Because the higher income earner now pays taxes on the amount of the alimony payments at their higher tax rate, the amount of taxes paid on the alimony amounts likely increases because of the new law. The impact of the law may be that alimony payments are reduced to account for the tax shift and the lower overall total income between the two parties.
How Does New Alimony Tax Law Affect Alimony in Alabama?
The alimony deduction change affects alimony in Alabama because the law applies to all federal and state taxes paid by filers in Alabama. In addition to removing the federal tax deduction for alimony payments, the tax law changes for 2019 alimony also removes the state of Alabama’s alimony tax deductions.
Under the new law, former spouses who pay alimony can no longer deduct their alimony payments from their Alabama income taxes just like they can no longer deduct alimony payments from their federal income taxes. Likewise, alimony recipients no longer need to count the alimony that they receive as income for Alabama income tax purposes.
The law for Alabama alimony taxation comes from Alabama Code Title 40 Revenue and Taxation section 40-18-15(a)(17). The law says that in the State of Alabama, the amount of alimony a spouse may deduct from their taxes is the same as the amount that the spouse may deduct from their federal income for tax purposes. Because the federal law changed to no longer allow alimony deductions, the state law automatically changed. The new tax law affects alimony in Alabama because alimony payers may no longer deduct alimony payments from state or federal income taxes.
When Will New Divorce Tax Law Go Into Effect?
The new divorce tax law went into effect as of January 1, 2019. For divorces that are final on or after January 1, 2019, the new tax law applies. Spouses divorcing after this time follow the new tax rules for 2019 and every year after that. If a divorce is already filed but not finalized by 2019, the new tax laws apply because the divorce is not complete as of January 1, 2019.
It’s important to remember the 2019 tax laws when reviewing prenuptial and postnuptial agreements. An agreement that parties create before 2019 may have significantly different tax implications if the couple divorces after the new tax law and alimony are in effect. The disparities may create legal questions about the enforceability of the agreements and the potential to rescind or modify agreements.
Who Will Get Alimony Tax Deductions in 2019?
Who will get alimony tax deductions in 2019 depends on whether the divorce is finalized before or after the beginning of 2019. For spouses who divorce in 2019, the new law is in effect. For those spouses completing their divorce on January 1, 2019, or later, neither spouse gets an alimony tax deduction. The paying spouse can no longer take an alimony tax deduction. The spouse receiving the alimony does not count payments as income. Neither party gets an alimony tax deduction if the divorce becomes final in 2019.
What Will Happen to People Already Receiving Alimony?
The new law does not impact alimony orders that are already effective. For someone who receives alimony based on an order that’s effective as of December 31, 2018, the old tax rules apply. The person who receives alimony based on the order that’s effective before the new tax law is in effect is grandfathered in and must count the alimony payments as income.
A person already paying alimony based on a court order that’s effective as of December 31, 2018, may continue to deduct the payments from their income. If an order is effective as of December 31, 2018, but changed on or after January 1, 2019, the new alimony tax rules may apply. Parties seeking to modify an alimony order that’s already in place should remember that changes in the alimony order may also change the tax burdens for both parties.
Child Tax Credit Changes in 2019
In addition to changes in alimony tax laws in 2019, child tax credits change in 2019 as well. A parent may now claim up to $2,000 in tax credits for each qualifying child. Parents should remember child tax credits when they consider their overall tax obligations in 2019. Although divorced parents may not split a child tax credit on an income tax return, the tax credits may impact the amount of money that a parent has available to pay alimony.
Contact a Huntsville Divorce Attorney at Leigh Daniel Family Law for Help
If you are considering divorce or if you have an alimony order already in place, Leigh Daniel Family Law can assist you. Our experienced family law attorney is here if you need help understanding and navigating these new tax laws. Call us or contact our offices online to speak with a knowledgeable member of our team today.