18 May Divorcing parties Need to be Aware of the Tax Reform Changes to Maintenance
Maintenance, formerly known as alimony, is one of the many areas affected by the Tax Cuts and Jobs Act. These new guidelines have drastically changed the way individuals who provide and receive maintenance record these transactions on their taxes. So, what do people need to know about the impending alterations?
What is the Rule Now?
Currently, maintenance is a court-ordered obligation to contribute money or assets on a continuing basis or by a total amount to the cost of living for another person. Currently, individuals who pay maintenance can deduct the amount from their income, while those receiving maintenance must pay a tariff on the amount received.
How Will it Change?
The change in the law will only be applicable to parties who obtained a divorce on or after January 1, 2019. Starting in 2019, individuals who pay maintenance will no longer receive a deduction. Additionally, the person receiving maintenance will not be required to treat the amount received as a taxable income. This change essentially shifts the taxation from the receiver to the payer.
Why Will it Change?
The new maintenance fee deduction is due to a disparity in tariff rates that ultimately create a negative effect on the payee. In many situations, the individual who receives maintenance is in a lower tax bracket, which translates into paying smaller fees than the payee. This change will eliminate the current divorce subsidy in which a separated couple can achieve a better fee deduction than a married couple.
Basically, the tax revamp transferred the taxation from the maintenance recipient to the payer. This causes a little bit of concern, as some believe it might reduce the amount of maintenance awarded because more of it will go towards taxes. Working with a family law attorney can help individuals navigate the complicated divorce process and understand how the tax changes impact their separation.