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Expect to pay alimony after your divorce? Act now to save money

If you have plans to get a divorce, it's probably wiser if you don't wait until after the first of the year. In 2019, divorce is going to be more costly for some people.

The difference between now and then is that the tax rules shift dramatically in 2019 thanks to changes that are part of the Tax Cuts and Jobs Act. In many ways, the law will simplify the alimony process by making it easier to comply with tax regulations. However, it also will also eliminate the ability of divorcing couples of means to work together to reduce their overall tax burden and keep that money between themselves. That is likely to make negotiations a lot harder for couples where alimony is concerned.

Typically, alimony is most likely to be awarded in cases where one spouse has significantly more income than the other. Currently, the spouse who pays the alimony can deduct that amount from their taxable income -- reducing their overall liability.

The receiving spouse, who is usually in a lower income bracket, pays taxes on the alimony -- albeit at a far lower rate than the paying spouse would have due to the different tax rates involved. Many high-asset spouses have an incentive to be more generous with their alimony payments, since they at least can deduct them on their taxes.

As of the start of 2019, that all ends. Alimony will be treated as a transfer of assets only. The receiving spouse will no longer pay the taxes. That means that whatever payments have to be made come out of the payer's net income -- which is bound to hurt financially a lot more. For the Internal Revenue Service (IRS), this is a big win because it allows the agency to tax the income at the higher-earning spouse's rate.

If you have a separation or divorce agreement in place before the end of 2018, you can use the old tax rules. Therefore, if you expect to pay alimony after your divorce, it's far better to see if you can negotiate your agreement before the year's end.

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