When people in Kentucky consider the possibility of divorce, they may have a new wrinkle to think about in the new year: the changing tax treatment of alimony payments. Passed as part of the 2017 Tax Cuts and Jobs Act, the new tax rules will go into effect as of Jan. 1, 2019. The changes have sparked concern and many people have rushed to finalize their divorces before the end of the year in order to maintain the current tax approach. After all, the new rules will only apply to divorces concluded in 2019 and beyond, not to people who have already finalized their separation.
The current alimony rules have been in place for decades. Under this approach, the payer of spousal support can deduct the amount of the payments from his or her taxes. In exchange, the recipient pays taxes at his or her tax bracket, which is usually lower. The significant tax savings that a wealthy person can reap have served as a strong incentive to include generous spousal support provisions as part of divorce negotiations. However, this will change under the new system.
Instead, the payer will receive no tax break for alimony payments; the recipient will also receive the funds tax-free, without the need to consider them as income. While this sounds like a windfall for spousal support recipients, it is likely to drive down the overall amount of alimony payments. Without the tax deduction incentive, there is little to impel a wealthier spouse to agree to significant spousal support.
Divorce always carries significant financial consequences, and they can be some of the most long-lasting effects of the end of a marriage. A family law attorney might help a divorcing spouse to plan for the future and reach a settlement on a range of matters, including spousal support and property division.