A Money Smart Divorce

Whether your divorce is amicable or rancorous enough to inspire a country music song, it’s important to pay attention to taxes when dividing your assets.

- Sandra Block

December is expected to be a busy month for the nation’s divorce courts. The tax overhaul enacted late last year eliminated the deduction for alimony, but unlike most provisions in the law, this one doesn’t take effect until 2019.

As of January 1, the IRS will treat alimony payments in the same manner as it treats child support, which isn’t deductible and is taxfree to the recipient. Currently, the ex-spouse who pays alimony can deduct the payments, and the exspouse who receives them must pay taxes on the money.

Even with the tax break, many alimony recipients will end up worse off, say divorce experts. Without the deduction, “the higher-earning spouse—usually the husband—isn’t going to want to give away as much money,” says Dean Hedeker, a Chicago-based tax attorney. By allowing higher earners to deduct alimony payments, the government was “essentially subsidizing the payors to allow them to pay more,” says Lili Vasileff, a certified financial planner and author of Money & Divorce: The Essential Roadmap to Mastering Financial Decisions (American Bar Association).

If your divorce is expected to include alimony, and you’re already far along in negotiations, it makes sense to get it done by December 31, Vasileff says. But don’t rush into a hastily drafted agreement that could cost you more than the deduction saves, says Heather Locus, a Chicago-based certified financial planner who specializes in divorce. In some states, it’s already too late. In California, for example, you can’t finalize a divorce until at least six months after filing, so if you didn’t file by June 30, you’re out of luck.

DIVIDING ASSETS IN A GRAY DIVORCE