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How could the alimony tax change affect me?

This blog has reported previously on the fact that the tax treatment of alimony, which often called spousal maintenance or spousal support, will be changing on January 1.

To summarize, alimony payments one makes will no longer be tax deductible on one's federal income taxes, and those receiving alimony will no longer have to report those payments as income. This change will affect new alimony orders entered after the first of the years; those already in force still qualify for a deduction subject to the rules now in force.

Obviously, this means that those who are on the hook for alimony will have to expect to pay more in taxes than they would had they been ordered to pay alimony at some point this year. The bottom line is that an alimony payment is harder on one's wallet in the net analysis, since there is no corresponding savings.

Moreover, high earners in the past have used big alimony payments, perhaps as a trade-off for some other considerations, as a win-win for both sides. For their part, the high earner was able to use the deduction to come down to a lower tax bracket, which meant not having to pay as many pennies on every dollar earned. The other side, on the other hand, got a nice chunk of money for what were usually relatively minor tax consequences.

With the win-win gone, some are predicting that divorces in Rockford, Illinois, as well as in other parts of the country, will be more contentious, as there is now one less mutually agreeable resolution on the table. This change may mean in the final analysis that someone will be more likely to need an attorney to help them negotiate, and litigate, alimony and related property division issues.

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