As 2019 rolls in, divorced individuals will have no choice to but to bid farewell to alimony tax rules that have been around for decades. Under a new tax code—made possible by the Tax Cuts and Jobs Act (TCJA) of 2017—that takes effect on January 1, alimony payments will no longer be considered tax-deductible for the spouse paying alimony and taxable income for spouse receiving spousal support. These new rules take effect after December 31, 2018 and will not affect existing divorces and separations.
Overall, it looks like spouses will end up pocketing less cash from alimony payments, whether they’re the ones paying or receiving money. But there are ways to make up for this.
Tax Benefits from Selling the Home
If you are getting divorced and thinking of keeping the family home, see if you can qualify for any tax benefits. The best option might be to sell the home to take advantage of a capital gains tax exclusion of up to $250,000 if you’re single and up to $500,000 if you are still married and filing jointly. So, it may be in your best interest to sell the property before the divorce is finalized.
Take Advantage of Child Tax Credits
Under the new tax code, the Child Tax Credit (CTC) amount awarded to parents will see a significant bump next year, raised to $2,000 per qualifying child—up from $1,000 under the current rules. So, if you’re negotiating for child custody, you can use plan ahead and use the CTC to offset alimony taxes.
And this part is important. If you are the parent of three children under the age of 17 and make $100,000 as a divorced spouse (the CTC is unavailable to individuals making $200,000 a year and couples earning more than $400,000), you qualify for $6,000 of tax credits. This makes the CTC more powerful than a tax deduction as it reduces your tax bill dollar-for-dollar.
Consider this situation: You’re a mother of three who owes the $4,000 to the IRS for the previous tax year. But you also qualify for a tax credit of $2,000 for each of your three children, which means you no longer have to pay last year’s taxes.
Look to Other Payment Methods
Spousal maintenance payments don’t have to be in the form of traditional alimony. For example, couples can consider property division payments instead of alimony.
If the couple’s marital estate is worth $2 million, they can agree for one spouse to pay the other $1 million in staggered payments. The benefit? Property division payments are non-taxable.
But this option isn’t perfect either. If the spouse paying property division files for bankruptcy, the property division payments could very well go away. In contrast, alimony payments are not dischargeable in bankruptcy.
What if You Beat the December 31 Deadline?
To be honest, if your divorce proceedings began during the last few months of the year, you’re probably too late. For example, if you had filed for divorce in November, it’s very likely you won’t get a judgment until next year.
To learn more about the other tax issues involving divorce under the new tax code, talk to the legal team of the Lyttle Law Firm. Call our offices today at (512) 215-5225, or use our contact form to schedule an appointment with Austin family law attorney Daniella Lyttle.