I’m getting divorced in 2019. How will the new alimony tax structure affect me?

With 2019 right around the corner, we want to give you a quick refresher on the alimony changes that go into effect on January 1, 2019.

Alimony, often referred to as spousal support or maintenance, is typically awarded as a rehabilitative measure to help the lower earning spouse get back on their feet financially. In Rhode Island, short-term spousal support is common, whereas long-term alimony is very rarely awarded.

Before the new tax alimony law was passed, the alimony tax structure was often considered a divorce tax benefit.

Here’s the breakdown:

Pre-2019 alimony tax structure: The payer was able to deduct alimony payments from their gross income and the payee had to pay taxes on it.

The rationale: The alimony paying spouse is the highest earner and as such, in a higher tax bracket. The alimony recipient earns less and is taxed in a lower tax bracket. This tax arrangement, coupled with the alimony payer’s ability to deduct the payments from their gross income, often helped divorced couples save thousands on their taxes.

New alimony tax structure: According to the new law, the alimony paying spouse is prohibited from deducting alimony payments from their gross income and the recipient no longer has to pay taxes on the alimony they receive.

The rationale: The government hopes this change will help them earn more than $8B in tax revenue over the next decade.

If you’re the payee or recipient of alimony in Rhode Island, here’s what the new alimony tax structure change means for you:

• If your divorce is finalized on or before December 31, 2018, your current alimony tax structure stays the same. You’re considered “grandfathered in” to the old tax structure and the new law won’t affect you.
• If your divorce is finalized after December 31, 2018, alimony will be calculated similarly to child support. As such, it will be a non-taxable event. The alimony payer is not entitled to a deduction for payment and the receiving spouse isn’t able to include the payment as income.

In Rhode Island, long-term spousal support is very rarely awarded. Often, a judge will order spousal support on a temporary, rehabilitative basis, with the goal of getting the lower income spouse back on track.

With the new law, we expect to see another decline in lower earning spouses receiving support. The new tax structure makes alimony increasingly difficult for the payer to handle, so the fight to avoid it will intensify.

As always, we’re here to help you navigate through divorce and alimony. Contact us today for a free consultation.