Changes in Alimony for Payer Spouse and Recipient Spouse under Tax Reform – JD Supra.
Since the early 1940’s, alimony payments have been tax deductible for the Payer Spouse. The recipient of the alimony (Recipient Spouse) paid the income tax on the alimony payments. The Tax Cuts and Jobs Act (TCJA) puts an end to a deduction for alimony payments by the Payer Spouse and corresponding inclusion in income of the Recipient Spouse in any divorce or separation instrument executed after December 31, 2018.
How does the Tax Reform define Divorce?
Under the TCJA, the term “divorce or separation instrument” means:
‘‘(i) a decree of divorce or separate maintenance or a written instrument incident to such a decree,
‘‘(ii) a written separation agreement,
‘‘(iii) a decree (not described in clause (i)) requiring a spouse to make payments for the support or maintenance of the other spouse.’’.
Taxpayers that are divorcing or considering divorcing ought to consider the following information:
- Prior to the TCJA alimony provisions that take effect on 12/31/18, an Individual paying alimony could deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction; which is a deduction that the Taxpayer does not need to itemize to take the deduction, and is considered more valuable for the Taxpayer than a deduction that is itemized. For the Recipient Spouse, alimony and separate maintenance payments were taxable and included in the Recipient Spouse’s Gross Income.
- As a result of the TCJA, in divorces and legal separations after 2018, the alimony Payer Spouse will not be able to deduct the alimony payments, and the alimony Recipient Spouse will NOT include the alimony in gross income or pay federal income tax on them.
- The TCJA rules do not affect existing divorces and separations.
- Current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.
Don’t be a victim of your own making. The TCJA will affect divorce negotiations. The law has not changed in 75 years and Practitioners are now understanding and reacting to the new law. Timing is of the essence given the effective date of 12/31/18. If you are divorcing or considering a divorce, consult your tax specialist now.