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New tax rules for alimony: Who's getting the better deal?

The media has given a lot of attention and speculation to the new alimony tax rules that came along with the tax reforms recently passed by Congress. According to the "Tax Cuts and Jobs Act," for divorces finalized after year-end 2018, recipients of alimony will no longer have to report their alimony payments as income, and they will no longer have to pay taxes on it. Meanwhile, the payers of alimony will no longer be able to deduct the payments from their income each year.

This has lead to a host of criticisms of the new tax bill. Some commentators are saying that the tax bill will destroy a bargaining chip that divorce lawyers commonly used to settle alimony issues.

Essentially, when the paying spouse got to deduct the expenses on his or her income taxes, it meant that the paying spouse could potentially drop down to a lower tax bracket in addition to the tax savings from the deductions alone. This benefit was, in many cases, a way to get spouses to come to agreement and settle alimony-related disputes. Another criticism says that alimony payments will now be reduced to account for the lack of tax benefit and the recipients of alimony will receive awards of less money.

The question is: Does any of this really matter to either side? Many are of the mindset that the issue will all come out in the wash. Alimony payment amounts may simply be adjusted to reflect the change in tax liabilities. Yes, on paper, one spouse might be paying more and the other spouse might be receiving less. However, when you negotiate your alimony deal strategically, both spouses will probably end up having the same amount of money in the end after considering taxes.

Source: CNBC, "Tax reform could shrink alimony for ex-spouses," Sarah O'Brien, Jan. 03, 2018

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