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Dealing with the new alimony tax rules

Many divorcing couples in California and around the country are eschewing family gatherings and other social engagements this holiday season in order to reach amicable settlements before the end of the year. They are foregoing traditional festive season celebrations because the tax rules relating to spousal support will change on January 1, and divorcing spouses must have a final alimony agreement or court order in place by December 31 if they want the current deductions to apply.

Under the current rules, which have been in place for longer than 70 years, alimony is a deductible expense for those who pay it, and for those who receive it, it's taxable income. This situation comes to an end in 2019, when the Tax Cuts and Jobs Act's provisions take effect. This will likely make negotiating alimony more difficult as the spouses who pay it generally pay higher rates of income tax than the ones who receive it. However, other aspects of the landmark 2017 tax reform law could offset the changes in the way spousal support is treated.

People with limited incomes who may receive lower spousal support awards because of the changes may benefit from higher child tax credits. These credits will rise from $1,000 to $2,000 under the new tax rules. Another approach is to incorporate a cash payment that can be paid in monthly installments in a property division agreement.

However, family law attorneys with experience in complex divorce cases may advise their clients to be wary of accepting monthly payments from property division agreements in lieu of alimony. This is because property settlement obligations can be discharged in a personal bankruptcy whereas spousal support cannot be. Another consideration is the remedies available should the payments not be made in a timely manner. The maximum wage garnish for delinquent property division payments is 25 percent, but wage garnishments to collect delinquent spousal support can be as high as 50 percent.

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