Alimony Tax Deduction: Time is Running Out!

Alimony is the legal term for spousal support separate and apart from any child support order. Alimony can be Ordered under Massachusetts General Laws Chapter 208, Sections 34 and 48 – 55. There are different types of alimony known as rehabilitative alimony, reimbursement alimony and general term alimony. Rehabilitative alimony is a short-term length payment designed to help a spouse get on his or her financial feet after a divorce. Reimbursement alimony is when one spouse has paid to put the other spouse through school or job training program and that spouse seeks a divorce once they make it through school and are now earning significant earnings. General term alimony is for when a spouse has financial needs and cannot support himself or herself without help. If your marriage is under twenty years in duration, there are limits as to how long a payor must pay alimony. If your marriage was twenty years or longer, alimony can be paid until the Payor reaches the Social Security retirement age (mostly 66 years and 10 months old or 67 years old). While there are exceptions to these rules, the above are the basic alimony rules. In Massachusetts, the alimony amount for general term alimony is between 30% and 35% of the difference between the Payor’s and the Recipient’s income.

At present, those paying alimony may deduct the payments on their federal taxes, while recipients must report them as income. However, the Tax Cuts and Jobs Act (TCJA) eliminates this. Beginning January 1, 2019, alimony payments may not be deducted from the paying party’s federal income taxes. However, alimony payment recipients will no longer have to report them as taxable income.

In order for you to deduct alimony going forward, your agreement must be signed by December 31, 2018. The reality is that time is running out to enter into agreements under which alimony will be tax deductible to the Payor and taxable to the Recipient. Attorneys and financial neutrals are currently trying to figure out how alimony will differ after January 1, 2019. Most family law practitioners believe that alimony orders going forward will be at a much lower rate to account for the lack of tax deduction for Payors. As this will be an entirely new law, whether or not the alimony percentage is reduced is uncertain. If you are getting divorced, it is important to either get an agreement signed by December 31st or to negotiate a lower rate to account for the lack of a tax deduction for the Payor.

If you are currently considering, or undergoing, divorce, think of the change to tax law as fresh impetus to bring the process to completion. You need the counsel of an experienced family law attorney to make sure that your alimony agreement is either reached and executed before the end of the year or that a lower percentage is negotiated that factors in that alimony will no longer be tax deductible.

If you have questions about alimony and the change in the Federal Tax Laws, please contact Attorney Schutzbank to discuss your options.

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