Will Tax Reform Affect Your Alimony? You Bet!
If you are wondering whether or not your alimony payments are still deductible, the short answer is YES, for now. But under a provision in the Tax Cuts and Jobs Act (TCJA), the deduction is repealed for agreements executed after 2018. Unlike most other TCJA tax changes for individuals that sunset after 2025, this provision is permanent.
For the present, alimony is generally deductible by the payor. This deduction is claimed “above the line” so it reduces adjusted gross income (AGI) for tax purposes and remains a valuable write-off for many. On the flip side of the coin, alimony payments represent taxable income to the recipient. This means taxpayers receiving alimony aren’t as lucky as those paying the alimony. However, in any divorce commenced after December 31, 2018, the spouse paying alimony can’t deduct it, and the spouse receiving the money no longer has to pay taxes on it. The new rule wouldn’t affect anyone already paying alimony, but big changes for divorce proceedings are ahead.
Items like child support and payments of property intended to even out a couple’s finances are generally not deductible by the payor or taxable to the recipient. The language in the divorce or separation agreement usually controls whether payments should be treated as alimony or not. However, to be deductible, the IRS has established the following requirements:
1. The spouses don’t file a joint return with each other.
2. The payment is in cash (including checks or money orders).
3. The payment is to or for a spouse or a former spouse made under a divorce or separation instrument.
4. The divorce or separation instrument doesn’t designate the payment as not being alimony.
5. The spouses aren’t members of the same household when the payment is made. (This requirement applies only if the spouses are legally separated under a decree of divorce or of separate maintenance.)
6. There’s no liability to make the payment (in cash or property) after the death of the recipient spouse.
7. The payment isn’t treated as child support or a property settlement.
The new rules won’t affect anyone who divorces or signs a separation agreement before 2019. So if you are contemplating divorce or separation in 2018, be sure to incorporate the points above into the final agreement for the intended consequences.
Another note of interest – legal fees paid to your attorney directly attributable to securing spousal support are no longer deductible. In addition, couples with pre-nup and post-nup agreements may want to revisit them. They have been drawn up assuming the alimony deduction would still be in place.
Got questions? We’ve got answers! Your trusted advisors and accountants at Fuoco Group are here to guide you through all life’s major changes.