I thought alimony wasn’t taxable any longer. I just received an email from my ex “reminding” me to put money aside to pay my estimated taxes in connection with the alimony I am getting. Our divorce was done in May and we agreed alimony would start on Sept. 1 of this year because my employment contract expired Aug. 31.
I thought I understood the tax law changes but his email is making me question the deal I made. Is my alimony really taxable? Are there any other tax issues I may have overlooked in negotiating my agreement?
Alimony was the big change everyone talked about when the Tax Cuts and Jobs Act took effect. What people did not talk about was that the taxability of alimony may not have changed on the state level. Some states follow the federal government’s lead. Massachusetts is not one of those states. In order for alimony to be a completely non-taxable event, the parties’ need to specifically state in the agreement that alimony shall not be a taxable event. Otherwise the assumption will continue to be that the payor can deduct the alimony paid on his/her Massachusetts return and the recipient will still have to report the income on his/her Massachusetts return.
Another common problem divorcing couples encounter is the deductibility of mortgage interest, particularly with a refinance. Prior to the TCJA, you could deduct the interest on mortgages of up to $1 million and home equity debt of up to $100,000. As of Jan. 1, 2019, you can only deduct interest on mortgages of up to $750,000. Also, the interest on home equity debt is no longer deductible unless you can prove it was used to buy, build or improve the home. Mortgages and home equity loans that existed as of Dec. 14, 2017 continue to be deductible as they were prior to the passage of the TCJA.
People often include in their agreements clauses that one party will refinance the mortgage and buy the other out. If the new mortgage is under $750,000, this is not a problem. But, if the new mortgage is over that amount, the interest on the loan above the $750,000 mark will no longer be deductible. While $750,000 sounds like a huge number, given the cost of housing in the Northeast, this actually impacts many people.
A final tip many people don’t realize, with the exception of the alimony provisions, most changes for most taxpayers expire after tax year 2025.