Divorce Taxation to Change in 2019

Published on: 14:17PM Feb 07, 2018

This is a sensitive subject, but with the continued financial stress in the farm sector, we may start to see more divorces.  For the last several decades, the tax laws have allowed alimony to be deducted by the paying spouse and be taxable to the receiving spouse.

As wealthy taxpayers enter into divorce decrees that would try to maximize the deduction to the high-tax spouse and have the lower tax rate spouse receive the alimony pay at a lower rate.  Congress viewed this as an abuse of the tax law, so starting in 2019, the tax rules have changed.

For any divorce agreements entered into after December 31, 2018 (or changes made to current agreements subject to this new rule), there will no longer be any deduction for the payment or taxation for the recipient.  Essentially all of the payments between ex-spouses will mostly be ignored.

However, this does not necessary mean that there are no tax consequences of a divorce.  For example, assume a husband gets to keep his pension plan worth $500,000 and the spouse gets to keep the house worth $500,000.  The husband will owe ordinary tax on the full $500,000, while the spouse who got the house likely will owe no or little tax on the sale of the home.

Tax planning for divorces are still required, however, the deduction/income between spouses due to alimony will be gone beginning in 2019.