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Alimony tax changes could affect retirement account contributions


With the New Year have come new changes to the nation's tax code, some of them major. One such change is proving to have significant effects for couples contemplating a divorce.

The change is to the way in which alimony payments are taxed. For nearly eight decades, individuals who paid alimony could deduct those payments from their income when filing their tax returns. Individuals who received those alimony payments, however, had to pay taxes on them. Beginning with divorces finalized on or after January 1, 2019, that will be reversed: ex-spouses paying alimony will no longer get a tax break, and recipients will receive the payments tax-free.

What difference does it make who pays the taxes on alimony? For one thing, letting the payer take the tax break has helped to settle some divorces where a spouse might have been reluctant to pay alimony otherwise. Also, because many ex-spouses will presumably insist on paying less alimony in a divorce than they otherwise might have with the tax break, recipients will also likely pocket less than they generally did even when it was taxable to them.

In addition, alimony recipients may find it more difficult to fund their individual retirement accounts. Contributions to an IRA must come from taxed income sources so, after paying taxes on their alimony payments, many recipients have used alimony in this way. Once the payments are not being taxed, they cannot be used to fund an IRA.

Dayton residents considering a divorce, or who have already begun the process, may wish to consult with a legal professional as to whether these changes will affect them, and how greatly. Some are even working toward finalizing their divorces in 2018 in order to utilize the current alimony taxation system before it disappears.

Source: CNBC, "Loss of alimony tax break in GOP bill may add to the financial pain of divorce," Annie Nova, Feb. 4, 2018

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