New Tax Law and Alimony – What You Need to Know

New Tax Law and Alimony – What You Need to Know

For the better part of the last century, alimony was a deduction for those who are ordered to pay it. Recently, President Trump signed into law the new tax bill, which will have sweeping implications for those going through divorces. Beginning with January 1, 2019, individuals will not be able to deduct alimony on their taxes.  To better understand the new tax law and alimony changes in South Carolina for 2019, here is what you need to know.

You Have 1 Year Before the New Law Takes Effect

Since the new law does not affect those already paying alimony under a court order, there may be a strong incentive for some people to finalize their divorces in 2018. For those with high incomes, this change could represent a significant blow to their annual bottom line. A person earning $100,000 who pays $20,000 in alimony would have previously only paid tax on $80,000 in income. Assuming about a 28 percent tax bracket, the person is now losing $5,600 to taxes annually. This, of course, is a broad oversimplification, but it demonstrates the potential impact of waiting to get divorced in 2019.

South Carolina Income Tax Deduction is Limited

The IRS will not allow a deduction for alimony payments to an ex-spouse, and South Carolina’s Department of Revenue still considers alimony taxable income for the recipient, the same as the federal government.

In high income-tax states like South Carolina, the new tax law and alimony changes therein could spell trouble for those looking to obtain a divorce. A wage-earner making over $14,550 in South Carolina pays 7 percent to the State.  Since the new federal tax law places a cap on the amount of state and property taxes that can be deducted from federal returns, this is a pretty big deal. With a cap of $10,000 on the amount of state income tax and property taxes (combined) that you can deduct from your federal returns, this may hurt both those paying and receiving alimony.

Re-married People May Want to Consider Filing Separately

It’s too soon to tell exactly how big the impact will be on individuals who are remarried and paying alimony to an ex. Previously, the new couple would not be taxed on any money paid to one of their exes. This makes good sense because a new spouse should not be paying tax on income that is paid to an ex. For this reason, some families may wish to get advanced tax planning to decide if filing separately would make more sense, especially where there is a large alimony payment.

Negotiate Other Items

Before, it often made sense for a high net-worth individual to offer alimony as a sort of bargaining chip to get the ex to take a tax-deductible payment each month instead of splitting up a retirement account or giving away large lump sums of cash. A lower-earning spouse would often be taxed at a lower rate anyway, making the alimony a welcome benefit. Regardless of where people stand on this issue politically, as a practical matter, the new law will likely result in higher net-worth individuals offering larger lump sums or tangible property settlements in exchange for lower alimony payments.

States Moving Toward Limiting Alimony

Some states are already moving to limit alimony to a brief amount of time (such as 5 to 10 years), except in the case of long marriages or exceptional circumstances. If this trend continues, we may see less of a negative effect from the new tax law. As usual, only time will tell.

Get Experienced Advice Now

With the new tax law and alimony laws that seem ever-changing, it is critical not to take chances with your financial future. If you and your spouse are considering a divorce or you’ve taken steps toward ending your marriage, contact Klok Law Firm LLC to schedule a confidential meeting to discuss your options. The new alimony provisions go into effect January 1, 2019, so you might want to act fast to protect tax benefits.