New Yorkers who got divorced in 2019 or had their divorce finalized in 2020 will view tax season differently this year.
Indeed, a recent report in USA Today emphasizes that anyone who paid or received alimony and/or spousal maintenance should be prepared. Quote Wizard recently released data showing that divorce rates rose in New York last year. To be sure, divorce rates rose by 7.69 percent in New York while the national rate dropped by 19.55 percent. Only two states saw divorce rates rise in 2019, including New York and Utah. Given that information, tax time will be particularly important to New Yorkers whose divorces included alimony. In other words, more New Yorkers will see the financial consequences of the 2017 tax overhaul this year.
The 2017 tax overhaul included a shift in alimony taxation.
Prior to the tax law changes, the spouse who paid alimony did not have to pay taxes on the amount. Instead, the spouse receiving alimony paid taxes on the money. To put it another way, the old version of the tax law benefitted the spouse who paid alimony. Although Congress passed the tax law in 2017, certain portions did not take effect until more recently. In particular, changes to the way the government taxes alimony did not take effect until 2019. Divorces granted up until December 31, 2018 used the old tax system. Differently, any divorce finalized on or after January 1, 2019 used the new system. The current tax season will be the first one where the new system of taxing alimony is in effect.
More New Yorkers filed for divorce in 2019 than they did in 2018.
Accordingly, more divorced couples may be dealing with the effects of the overhaul this year when they file their taxes. According to Syracuse divorce lawyer Richard J. Bombardo, “the new tax system benefits ex-spouses who receive alimony.” Indeed, Bombardo clarified, “those parties will not be taxed on alimony payments received.” Instead, their exes who pay alimony will also pay income tax on that money.
At the same time, it is important to know that the tax law changes also impact retirement account transfers.
If one spouse transfers money from an IRA to the other spouse, the receiving spouse will pay taxes on it. This type of transfer is common in marital settlement agreements in New York. Rather than pay alimony, spouses can negotiate a settlement that includes the transfer of other assets in lieu of alimony. However, with the tax law changes, a marital settlement agreement might not be as beneficial for the receiving spouse.