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In a change that could be costly for those who must pay alimony, tax reform will eliminate the alimony-payer’s ability to claim a tax deduction for the payments. Changes are set to take effect for divorces and legal separations after 2018, causing a push-me pull-you effect on current divorce proceedings.
Under the current rules, an individual who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction on their federal income tax return. That is, the taxpayer does not need to itemize deductions to claim the amount of alimony paid, rather it can be deducted directly off the taxpayer’s taxable income. The receiving spouse must pay income taxes on the alimony they receive as part of their annual gross income.
Note that this is different than tax laws governing child support. The payer of child support cannot claim the child support as an income tax deduction. The receiver of child support does not need to report the child support as income.
The Tax Cut and Jobs Act changes the tax law governing alimony beginning in 2019. Under new rules, there is no allowable alimony income tax benefit for the payer. Similarly, alimony will no longer be considered as income to the recipient. To be clear, for divorces and legal separations legally effective due to a court order after 2018, the alimony-paying spouse may not deduct the payment and the alimony-receiving spouse need not report payments as gross income nor pay federal income tax on them. The tax treatment of child support payments will not change.
The bottom line: All payments related to divorces and legal separations effective beginning in 2019 will represent nondeductible personal expenses for the payer and tax-free money for the recipient. The loss of a substantial tax deduction could be expensive for individuals who must pay alimony.
If you are involved in divorce proceedings and anticipate deducting the alimony you may have to pay, the new tax law gives you a major incentive for concluding the agreement by December 31, 2018. On the other hand, if you will be receiving alimony, you have major incentive to postpone finalizing the agreement until 2019 to receive the payments tax free. Make certain your divorce attorney is up-to-date on the new tax law that could cost you or save you thousands of dollars.
The new tax law will not apply to existing divorces or separations, so current rules will continue to apply for already-ordered divorces and separation agreements, as well as divorces and separations that have been executed before 2019. In addition, the new rules will not apply to a modified decree of an agreement that was entered into prior to 2019 unless the decree specifically provides that they should. This would benefit taxpayers requesting modified agreements due to a change in the income of either the alimony payer or the alimony recipient.
To learn how the new tax law may affect you should you be divorced, legally separated, or seeking a divorce or legal separation, contact one of our tax planning professionals at McRuer CPAs for information.
