In 2018, many divorcing couples in Pennsylvania rushed to finalize their divorce before new tax laws took effect on January 1, 2019. Why was this? CNBC notes that at the start of 2019, alimony payments were no longer tax deductible under the tax reform. In contrast, the person receiving the income no longer has to claim it as taxable income.
This may at first present a favorable situation for women, who are usually at the receiving end of alimony payments. Closer inspection says otherwise. The payer may be more reluctant to provide higher alimony payments if they will not be tax deductible. This may create a financial crisis for the homemaker in the family who may have set their careers aside to move with their spouse, take care of the home, raise the children or all of the above.
To resolve the issue, CNBC recommends that couples reconsider how they structure divorce settlements. For example, the ex who is paying the alimony could make one lump sum payment instead of monthly payments. They could even pay the lumpsum in installments as division of property is non-taxable. This may also eliminate tension caused by the bitterness one spouse may feel about continuing to provide an income to an ex after divorce. Reduced tension could lower the overall cost of the divorce as the more partners fight, the more expensive divorce tends to be.
In spite of the complications, financial experts warn divorcing couples not to panic. While unfavorable, the new changes are not the end of the world. Couples may just need to work together to find peaceful and mutually beneficial solutions.