Under current tax laws, Michigan residents who pay spousal support as part of their divorce agreements have the ability to deduct their payments on their taxes. Those who receive the payments have to pay taxes on them. Thanks to the Tax Cuts and Jobs Act, in 2019, these alimony rules are about to change.
Whom will this law affect? What changes can you expect to see? Is there any way around the law changes?
Those who fail to finalize their divorces by Dec. 31, 2018 will be subject to the new alimony laws. As Michigan has a waiting period, this means that anyone just starting the divorce process will not be able to meet the deadline to keep the benefits associated with the current spousal support laws.
With divorces finalized after Jan. 1, 2019, those ordered to pay alimony will no longer have the option to deduct their support payments on their taxes. This means they should likely expect higher tax bills come tax season. Those who receive support payments will no longer have to count the money as income, which could decrease their tax obligation. Those who seek to modify their alimony agreements after the new law takes effect will be subject to these changes as well.
Obviously, there is a benefit to finalizing your divorce before the end of the year — if you can — if you will be paying alimony, and a benefit to waiting until next year if you expect to be paid support.
A way around it
If it is too late for you to meet the deadline and you have concerns about how the new tax law will affect you as an alimony payer, know that there may be a way around the loss of the tax benefit. The new law allows you to transfer funds from your retirement account to pay spousal support through an Individual Retirement Account. The person receiving the funds may have to pay taxes if they withdraw the money before they reach the age of 59 and a half.
The new alimony tax law changes a lot, and it can certainly affect how you choose to divide your assets and pay or receive spousal support. With legal assistance, you will be able to come to terms that work for you long-term.