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New tax law will change treatment of alimony payments

The tax law Congress passed last month will have a direct impact on couples who divorce in 2019 or later. It may also have an indirect impact on negotiations taking place now. The new law ends the 75-year-old tax deduction for alimony, which is called "maintenance" in Kentucky.

Under current law, maintenance payments are tax deductible by the payer and considered taxable income for the recipient. Both of those rules will change for divorces initiated after Dec. 31 of this year, according to the Associated Press. The change treats alimony more like child support, which is neither taxable income to the recipient nor tax deductible by the payer.

What that means, the AP says, is that many divorced pairs will pay more overall in taxes. For example, in a situation where Spouse A is a high earner and Spouse B is a lower earner, spouse A could pay $30,000 in maintenance. At a 33-percent tax rate, A currently saves $9,900 due to the deduction.

Since Spouse B pays taxes at a lower rate, it isn't a wash. Although B has to list the $30,000 as taxable income, B would only pay $4,500 on that income at a 15-percent tax rate. That means that, viewed as a pair, the two exes have saved $5,400 in taxes overall.

Under the new law, maintenance payments are not tax deductible and are not considered income. The couple described above will lose the $5,400 to taxation.

How significant is the change? Should it affect the timing of your divorce?

According to the Census Bureau, 243,000 people received maintenance in 2016. The IRS says 361,000 taxpayers reported paying alimony in 2015 -- to the tune of $9.6 billion. According to the nonpartisan Joint Committee on Taxation, the change in the law will bring in $6.9 billion in new revenue over 10 years.

Several divorce attorneys contacted by the AP expressed concerns about the change. For many divorced pairs, the deduction does result in a significantly larger total estate. This makes it easier to make the transition between living as a single household and living separately.

Perhaps more important, however, is the deduction's value during negotiations. Knowing that maintenance payments are deductible makes it more palatable for many payers to agree to a maintenance arrangement.

Ultimately, however, maintenance is only a single factor in an overall divorce settlement or order. The end of the deduction, and its timing, may be used as bargaining chips, but you should make decisions based on your overall goals. Your divorce attorney can help you determine how valuable the deduction would be in your situation and time your divorce accordingly, if appropriate.

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