Since about the early part of 2018, it’s been in the news that the federal government has changed the way alimony, also referred to as spousal support, gets treated for federal income tax purposes.
For the last 75 years up until now, a person ordered to pay alimony could usually take such payments as a tax deduction. On the other hand, the person receiving these payments had to report them as income on his or her tax returns.
Starting with orders entered on January 1 of the new year, alimony payments will carry no tax consequences with them one way or the other. In this sense, these payments will be much like child support. It should be noted that those with existing orders can continue to treat them on the tax returns as they have in the past.
According to reports, this change is going to have broader implications than just how one manages his or her taxes. Some are suggesting that is going to make the property division process more contentious. The reason is that, with the tax incentive, people up until now had every reason to agree to making a substantial alimony payment, often in lieu of having to fight over property.
The alimony deduction was considered a win-win since the payment could help a person save tax dollars by reducing their taxable income and, depending on the facts, even their marginal tax rate. On the other hand, the person receiving alimony could often do so with minimal net tax consequences, even though the payments were considered income.
Now, people may be less inclined to negotiate alimony payments in an effort to avoid court. This may make the need for an experienced family lawyer more urgent among Phoenix residents.