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Alimony and tax responsibility

| Apr 1, 2018 | Property Division |

Connecticut spouses who are considering a divorce this year or possibly next year in 2019 should take the time to evaluate a rather significant change in the tax code that may have major implications for the outcome of their divorce settlement. 

As explained by the Internal Revenue Service, when a divorce decree today involves the order that one spouse make alimony payments to the other spouse, the person who pays the alimony does not have to pay income tax on the funds. Instead the person who pays spousal support actually may deduct the income from their tax return. The person who receives alimony payments must then claim that money as income on their tax return and therefore is responsibility for the income tax on the funds.

This rule has been in place for some time and does require that the spouses file separate tax returns and that payments are made in cash only, not in the form of any other type of asset. Property division awards are handled separately for tax purposes. All of this is set to change at the start of next calendar year. MarketWatch notes that starting January 1, 2019, the responsibility for taxation on money paid as spousal support will reverse.

It will be the person who pays alimony that will also pay income tax on the funds. This may well feel like a double hit to those spouses and could therefore logically make people more resistant to agreeing to these payments. The outcome of many divorce settlements may change dramatically as this law taxes effect.