If you are preparing for a divorce in the coming year, take some time reviewing the new Tax Cuts and Jobs Act that was ushered into congress late last year.
“Over 600,000 taxpayers claimed a deduction for alimony on their 2015 returns, but for divorces entered into after 2018, alimony will no longer be deductible by the payor and the income will not be taxed to the recipient, thanks to the Tax Cuts and Jobs Act.”
After December 31, 2018…
Divorce agreements will be subject to new tax rules starting in 2019, as a result of the Tax Cuts and Jobs Act. Individuals who pay their former spouses will no longer be able to deduct that money. The recipients will no longer pay taxes on that income. Again, this law applies to divorce agreements that are formed after the New Year. So if you are receiving alimony and have it arranged for the next two decades, nothing changes. Divorces in effect after December 31st will have a different route for those payments.
The rules also usher in changes for how divorcees on both sides may or may not use retirement accounts. Alimony payments will fall under new tax rules. That could mean big changes for your retirement accounts. If you are making alimony payments, current rules require you to pay in cash to qualify for a deduction, but for divorce agreements made after the new rules kick in, you will be able to transfer funds from your retirement accounts instead.
The new tax rules could restrict the way you save for retirement.
Because those funds will no longer be considered taxable earned income, it will no longer be possible to invest that money in an individual retirement account. If you don’t work and only receive alimony, that could change what you’re able to put into a retirement plan. Whereas if you have other income or earnings, you could use that money for a retirement plan.
For more information on how the new Tax Cuts and Jobs Act could affect you, refer HERE.