Divorced with Alimony Not Yet Determined

When alimony terms haven't been finalized, advance tax planning can help negotiate the most tax-efficient outcome. Understanding the treatment differences between pre-2019 and post-2018 agreements is critical.

The 2019 dividing line matters for negotiation. Under current law, alimony in any new agreement is not deductible by the payer and not taxable to the recipient. This means a $3,000 monthly payment costs the payer $3,000 after tax and the recipient keeps $3,000. Under the old rules (pre-2019 agreements), the same payment might have cost the payer $2,100 after the deduction while the recipient netted $2,400 after tax. The economics have shifted.

Temporary orders have tax consequences too. If a court has issued temporary support while the divorce is pending, those payments may or may not qualify as alimony depending on the specific terms. Payments under a temporary order that meet the IRS definition follow the same rules as permanent alimony. Payments that don't meet the criteria are treated as non-deductible transfers.

Property division as an alternative. Some settlements shift value through property division instead of alimony -- transferring a larger share of assets to one spouse. Property transfers incident to divorce are tax-free, which can be more efficient than ongoing payments depending on the assets involved.

The pitfall: Agreeing to alimony terms without modeling the after-tax impact for both parties often means one side leaves money on the table. A CPA running the numbers before the agreement is final can shift the outcome significantly.