The Tax Cuts and Jobs Act (TCJA) has made changes to the tax treatment of alimony for divorces and legal separations after 2018 and, by election, legally modified separation or divorce decrees.  You will need to take into consideration these changes if you are in the process of considering a divorce.  You will also want to consider modifying your decree to take advantage of these tax law changes on alimony.

Tax Rules Under Current Laws

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. (An “above-the-line” deduction, i.e., a deduction that a taxpayer need not itemize deductions to claim, is more valuable for the taxpayer than an itemized deduction.)

And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse (includible in that spouse’s gross income).

To qualify as alimony:

  1. Payments must be made directly to ex-spouse in the form of cash.
  2. The payments must be required as part of a written divorce or separation agreement.
  3. The decree may not designate such payment as a payment which is not includible in gross income of the recipient or as not deductible by the individual who pays the alimony.
  4. The recipient and the individual paying may not live together.
  5. The payments may not be part of the support of children of the individual paying spouse or have any child-related contingency (i.e., child reaches age 18).
  6. There is no liability to make payments after the death of the recipient.
  7. The parties may not file a joint return.

Please note that the tax rules for child support—i.e., that payers of child support don’t get a deduction, and recipients of child support don’t have to pay tax on those amounts—is unchanged.

How it’s Changing

Under the TCJA rules, there is no deduction for alimony for the payer. Furthermore, alimony is not gross income to the recipient. So for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them.

TCJA rules don’t apply to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.

Some taxpayers may want the TCJA rules to apply to their existing divorce or separation. Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree, unless the modification expressly provides that the TCJA rules are to apply. There may be situations where applying the TCJA rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.  This also creates an opportunity for the paying spouse to reduce their payments by the tax savings of the receiving spouse.  Any modification of a legal document must be done with the consultation of an experienced attorney who can walk you through all consideration beyond the tax rules.

Additional Considerations

If you are considering a modification to your decree in the first three years of its existence you should also be aware of the recapture rules that apply to front-loaded alimony payment.  This rule applies if alimony paid in the third year of the first three-year period is more than $15,000 less than in the second year or if the alimony paid in the second and third years decreases significantly from the amount paid in the first year.  Careful planning should be considered to avoid the partial loss of your earlier deduction for modifications occurring within the first 3 years of your decree.

If you wish to discuss the impact of these rules on your particular situation, please give me a call (703.777.7739) or e-mail.

About the Author

Jim SnyderJames Snyder, CPA, CSPM is a principal at YHB in the Leesburg, VA office. He provides income and estate planning services, business consulting, and estate and trust administration services to successful individuals in many professions, especially engineering, law, technology and real estate. He also provides strategic guidance and planning for clients involved in stock option transactions and wealth transfer.

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