Maintaining after Maintenance: Preparing for Tax Season
Maintenance, formerly referred to as alimony, is a monetary payment from one spouse to another spouse in need of financial support during and after a divorce. Maintenance can be in the form of regular monthly payments, which can be temporary or indefinite. Courts consider many different factors in determining the amount, type, and structure of maintenance after divorce, and parties to a divorce and their attorneys should take all of these factors into account when negotiating an appropriate maintenance award and structure.
Regardless of the structure, maintenance normally leads to an income increase for the spouse awarded the payment as part of a divorce. This means that unless otherwise stated, the receiving spouse will have to pay taxes on the support he or she receives from a former spouse. It is therefore important for the receiving spouse to understand the financial impact that our ever-changing income tax laws can have on the award. Individuals trying to interpret and understand tax language should seek the help of professionals to help them navigate the effects of income tax laws and income tax law changes on any maintenance award they may receive.
Tax laws frequently change, which can affect the taxation impact of a maintenance award. For example, new tax laws increase tax liability fairly substantially for many high-income earners. The American Taxpayer Relief Act (ATRA) requires new thresholds and corresponding tax increases for income brackets. Existing tax brackets have become permanent and a new 39.6% tax bracket was added for individuals who earn $400,000 or more. To avoid any surprises changes like these can cause for a divorced spouse, those spouses receiving maintenance or contemplating a divorce would benefit from:
- Performing personal research to gain a basic understanding of how current tax laws impact divorce settlement awards. For example, the IRS's Publication 504 is a resource for legally separated and divorced individuals and is updated every January.
- Working with financial professionals to understand how tax laws and any changes will affect them on a personal level.
- Discussing financially beneficial options for structuring the settlement with a family law attorney.
The reputable and dedicated attorneys at Mirabella, Kincaid, Frederick & Mirabella, LLC can assist you in formulating the most appropriate maintenance award for your individual case. If you or someone you know is contemplating divorce, contact us to set up an appointment for a free consultation today.