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Managing a divorce following new alimony tax laws

On Behalf of | Dec 27, 2018 | Divorce

When couples in Minnesota contemplate divorce, they likely think about how they will divide up their assets, who will have custody of any children involved, who will get the home or whether it’s best to sell the home and then divide the assets. As of Jan. 1, 2019, divorcing individuals will face new tax guidelines that may impact how they go about making these decisions.

For more than seven decades, tax law stipulated that the money an individual paid to their ex-spouse as alimony was tax-deductible. Conversely, the money an individual received as alimony from their ex-spouse was considered taxable income. As a result of the changes in tax law, this will no longer be the case.

Other changes that went into effect in 2017 include a change on mortgage interest deductions. Prior to this change, mortgage interest deductions were capped at $1 million. Now, they are capped at $750,000. This may affect whether one of the spouses wants to keep the house as keeping the house may not have the same tax benefits as it did in years past.

A good option that some spouses may consider is the division of property payments as opposed to alimony. As an example, the couple could sell their home worth $1 million, and one spouse could have the responsibility of paying the other spouse $500,000 over the period of multiple months or years. Division of property is a nontaxable event.

The downside of doing this is that if one spouse files for bankruptcy, the bankruptcy could lead to the division of property payments disappearing. Alimony is usually not discharged in a bankruptcy.

A family law attorney may help their client by providing them advice and guidance as they go through the divorce proceedings. An attorney may be able to help their client understand property valuation, draw up documents pertaining to child custody and alimony payments and represent their client in court if needed.

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