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Tax Overhaul Could Impact Divorcee Lending This Year

Taxable income changed in 2019. An alimony sender now pays IRS taxes on the money, but the receiver’s lower IRS-taxable income could make it harder to get a mortgage.

NEW YORK – Thinking about splitting with your spouse? The 2017 tax overhaul has made things more complicated.

For recently divorced Americans, alimony payments are no longer tax-deductible for the payer, and they aren’t considered taxable income for the person receiving them, ending a decades-long practice. The changes affect divorce agreements signed after Dec. 31, 2018.

Divorce, “can have a pretty meaningful effect on the outcome for individuals’ incomes,” says Katie Prentke English, co-founder of Harness Wealth, a New York-based wealth manager provider.

The tax changes benefit people receiving alimony in most cases, according to tax professionals, because they are no longer required to claim alimony as income and won’t pay tax on it.

It also could affect social programs that alimony recipients qualify for since their income will appear lower than it actually is. If they’re not required to report alimony income for health care, their income will be lower and they potentially could get a better subsidy, experts say.

The tax code changes also will affect IRAs. When a spouse paying alimony transfers funds from their individual retirement account to use as alimony payments, those funds will no longer be taxed upon withdrawal, according to English. The receiving spouse will then pay tax on that money once they receive it.

The new rules could restrict how alimony recipients stash money away for retirement.

“For recipients, alimony payments can’t be invested into an IRA, which can be problematic for a partner who’s not working and all of their income comes from alimony,” English says.

The new tax law also affects divorce expenses. Spouses can no longer deduct legal fees or any expenses related to divorce as they could before. Those are now considered personal expenses under the law. And child support payments aren’t deductible by the payer or taxable to the recipient.

Before 2018, filers were allowed to take dependency exemptions for children. But those exemptions can no longer be used. Parents had been able to claim a dependency exemption for each child they supported, which worked like a tax deduction by reducing their taxable income.

But there’s still good news. A person with children younger than 17 may still be able to claim the Child Tax Credit for $2,000 per child, according to David DuFault, an attorney at Charlotte, North Carolina-based Sodoma Law. And if a parent is still supporting a child older than 17, they could claim a dependent credit for up to $500, he says.

A tax credit is generally better than a deduction because a deduction only reduces your income, where a credit will reduce the tax you owe, DuFault explains.

“People need to make sure they’re taking advantage of those child tax credits since we don’t have dependency exemptions anymore,” DuFault says. “Be aware of any terms in your separation and divorce documents that address who can claim these credits and when.”

Copyright 2020, USATODAY.com, USA TODAY, Jessica Menton