Divorce agreements and the new tax code

Among the provisions in the recently passed tax legislation is a major change in how spousal support funds will be taxed.

Among the many aspects of getting divorced that Texas spouses may dread the most is the process of coming to an agreement about the various elements of their divorce. Part of what makes this so difficult is that each point to be agreed upon can be very intertwined with others.

For example, how assets are divided may well be impacted to some degree based upon any agreement for one spouse to pay alimony to the other. Each of these decisions can have significant tax implications for both spouses. CNBC explains that the taxation on spousal support money is about to change and that could result in a big shift in the outcome of many divorce agreements.

How is alimony money taxed today?

For a long time now, the spouse who receives alimony has reported that money as income on their tax returns and therefore payed income tax on it. Simultaneously the spouse who has paid alimony has been able to deduct the payments from their tax returns.

How will alimony be taxed under the new tax law?

According to MarketWatch, effective January 1, 2019 this will all change. From that point forward, the spouse who pays alimony will no longer deduct the payments but instead will pay income tax on that money even though they only hand the money over to their former spouse.

For a divorce that is finalized before the end of this calendar year, the existing taxation model will remain in effect unless an official divorce modification occurs.

What will happen if 401K funds are used to pay alimony?

Per the Internal Revenue Service, a person required to pay spousal support may use a qualified domestic relations order to allow them to access retirement money to make these payments. When this happens, the tax liability for the money withdrawn from the account is assigned to the recipient. Exactly how this will be tracked is not yet known.

How will people need to approach divorce agreements?

There are many unknowns about how exactly a couple may need to adjust when getting divorced or modifying an existing agreement starting in 2019. What is known is that the need to pay taxes on money paid out as alimony is quite likely to make many spouses more reluctant to agree to these payments. That could be a big game changer for many spouses, especially those who may need alimony to help them after a divorce.

Anyone facing the end of a marriage should talk with an attorney in Texas to get help in understanding the various implications of their potential settlement decisions.