Tax laws around alimony are set to change in 2019 for people who live in Michigan and throughout the country. However, experts are unsure just how the new rules will play out.
The current law allows people who pay alimony to deduct it from their taxes and requires the person who receives alimony to pay taxes on it. For divorces that happen after the end of 2018, this will no longer be the case. The alimony payment will no longer be tax deductible, and the recipient will not have to pay taxes on it.
However, this will not necessarily lead to more money for the recipient. As an example, a person may pay $100,000 to an ex-spouse in alimony. After the tax deduction, the payment may only cost the person $50,000. Meanwhile, after paying taxes, the spouse gets $75,000. Under the new tax law, the spouse paying alimony might still argue for paying only $50,000. Therefore, although it is tax-free for the recipient, it is still less money.
Mediators and others who work to negotiate divorce agreements say that the tax deduction can often be used as a tool to push a negotiation forward. One divorce financial analyst says the new law could cause more litigation. Furthermore, since some retirement account contributions must be made from taxable income, recipients may be less likely to save for retirement.
Divorce often leaves people in a financially vulnerable position whether or not alimony is involved. As a result, it is important for people to remain focused on protecting themselves financially during negotiations. Divorce can feel emotionally overwhelming at times, and in some cases, people might feel pressured to give into negotiations to get the process over with more quickly. People may want to talk to their attorney about their financial concerns and goals to create a strategy for negotiations.