In 2020, there is no alimony deduction. In 2018, the alimony deduction that was available was the same that had been part of divorce planning strategies for over seven decades. The deduction had allowed the ex-spouse paying support to deduct it on their taxes. That gave them a tax break. The ex-spouse who received it had to pay taxes on it. That shifted income from a higher tax bracket to a lower one, in many cases, which meant that more money stayed in the family.
Now, that deduction is gone completely. Only divorces that were finalized prior to 2019 retain the tax status, but those after 2019 don't have the same tax benefits. That only considers federal taxes. States sometimes allow deductions and taxes, but not all do.
Do recipients of support pay taxes on it?
No, and that might seem like a good thing, but it isn't always. In most cases, the person paying will now have to account for taxation at a higher rate, which means that they may only be able to afford to pay a smaller amount in spousal support. Essentially, both spouses will end up with less than in the past few decades with the previous tax exemption.
Are there ways to avoid alimony and the alimony tax?
There could be ways to avoid alimony, depending on the specifics of your case. For example, you may want to talk about splitting your assets differently, so that your spouse can liquidate a portion after the divorce for spousal support. You could forgo alimony in exchange for a piece of property, a stock or some other asset that has a similar value.
It's not always possible to avoid paying or receiving alimony, though, if it's necessary. If you do need to pay support to your ex-spouse, you will need to account for the change in the law, so that you make sure you are still retaining enough of your earnings. On the other hand, if you are receiving alimony, you'll want to make sure you're receiving enough to cover your needs and accounting for any amount you can't get by seeking a greater number of assets during your divorce.
Your attorney will sit down to talk to you more about changes in alimony and spousal support in 2020 and how it may affect your divorce. With laws constantly changing in Minnesota and federally, it's important to get up-to-date facts.