Divorce, even in its simplest form, is not very simple. There are many ways to go about dissolving the marriage and identifying the one that is best for your situation can feel daunting. The emotional aspects certainly require attention. But perhaps the most pressing issues revolve around money.
Spousal support, traditionally known as alimony, is a matter that can create a great deal of controversy. Whether it should be paid, who should pay it, and for how long can all be points of negotiation. As we noted in a post earlier this month, in some circumstances opting to resolve spousal support with a lump-sum payment might make sense. However, to make the best decision in this regard, you need to be aware of all your options. There may be pros, but also cons.
Tax implications always deserve to be considered, and this is truer now in the light of the recent tax overhaul law.
Under the current tax regime, alimony is typically a tax deduction for the spouse who pays and counted as taxable income to the recipient. This often has benefits to both parties because of differing tax brackets. The payer, who is usually in a higher tax bracket, gets a break. The receiver, being in a lower bracket pays less tax.
That changes with the end of this year. With divorce and separation agreements signed after 2018, spousal support payments won’t be deductible. Recipients won’t have to report the money as income on their returns.
This might change might not make lump-sum support payments obsolete, but there could be changes. Many experts predict reduced support will be the result, regardless of the timing of payments.
All this serves as a reminder of the importance of going through the divorce process with eyes wide open.
