For over 75 years, payers of alimony (also known as spousal support or spousal maintenance) were allowed to take a tax deduction for the amount of alimony paid to their ex-spouse. This shifted the income tax burden to the receiver of alimony, which in many instances increased the amount of income available to spouses transitioning to two households.
Under the new Tax Cuts and Job Act (TCJA), alimony will be treated differently for divorce or separation documents put into effect after Dec. 31, 2018.
What Does This Mean?
In brief, the new tax rule eliminates the payer’s ability to deduct alimony from their federal taxes. However, this all depends on when you execute, or executed, your alimony agreement or court order. For instance:
Current Payers of Alimony or Receivers of Alimony
♦ For those who already pay or receive alimony, the TCJA changes will not affect you.
• Payers — you may continue to deduct alimony from your federal income taxes
• Recipients of alimony — you will continue to report alimony payments as taxable income
♦ This tax treatment will continue to apply even if your alimony agreement or court order is subsequently changed – unless the modification specifically states that the TCJA treatment of alimony payments now applies.
Payers of Alimony or Receivers of Alimony — Documents Executed Before Jan. 1, 2019
♦ Similarly, for those who execute alimony documents before Jan. 1, 2019, the TCJA changes will not affect you.
• Payers may deduct alimony from federal income taxes.
• Recipients of alimony will report alimony payments as taxable income.
♦ This tax treatment will continue to apply even if your alimony agreement or court order is subsequently changed — unless the modification specifically states that the TCJA treatment of alimony payments now applies.
Payers of Alimony or Receivers of Alimony — Documents Executed After Jan. 1, 2019
• Payers of alimony — you cannot deduct alimony from your federal income taxes; you will have to pay tax on the income transferred to the alimony recipient
• Recipients of alimony — you will not include monies received from alimony in your taxable income
• For tax purposes, alimony will be treated the same as child support, which is not taxable income to the recipient
What Happens Next?
It is still unclear exactly how the new alimony tax rules will impact divorces.
Historically, spouses who were required to pay alimony, did so knowing they could deduct those payments from their taxable income which was an incentive instead of battling the subject in court. Without this tax incentive, spouses may argue over the alimony payment amount which in turn could turn out to be less alimony for the receiving spouse. Additionally, the change in the law may impact how child support is calculated in cases involving minor children.
JDSA Law is committed to staying well-informed on how these tax changes will impact you. Listen to our July 24 Law Talk podcast at jdsalaw.com/law-talk for more on this topic — or connect with us, Jordan Miller (Family Law) and Lindsey Weidenbach (Tax Changes), for assistance.
Jordan Miller is a partner at Jeffers, Danielson, Sonn & Aylward, P.S., practicing in family law. If you have any questions about this topic or another family law matter, send him an email at JordanM@jdsalaw.com or call 662-3685. Lindsey Weidenbach is a partner at Jeffers, Danielson, Sonn & Aylward, P.S., practicing in many areas of law including agriculture, business, cannabis, estate planning, tax and 1031 exchanges. If you have any questions about this article or another tax matter, send her an email at LindseyW@jdsalaw.com or call 662-3685.