If you are in the process of getting divorced or separated, or are about to embark on proceedings, you might want to resolve matters before the end of the year. What’s the rush? Under the Tax Cuts and Jobs Act (TCJA), alimony expenses paid pursuant to agreements executed after 2018 are no longer deductible.
Most the changes for individual taxpayers in the TCJA went into effect in 2018 and are scheduled to sunset after 2025. But the repeal of alimony deductions, which is permanent, generally does not take effect until next year.
Background: For 2018, payers can deduct alimony paid to recipients “above the line” on their federal income tax returns. The alimony payments constitute taxable income to recipients. Conversely, no deduction is allowed to payers of child support, while child support is not treated as taxable income to recipients.
To qualify as deductible alimony, the following requirements must be met:
- The spouses do not file a joint return with each other.
- The payment is in cash. This includes monetary instruments like checks.
- The payment is made to or for a spouse or a former spouse under a divorce or separation instrument.
- The divorce or separation instrument does not designate the payment as not being alimony.
- The spouses are not 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.)
- There is no liability to make the payment after the death of the recipient spouse.
- The payment is not treated as child support or a property settlement.
But these requirements will become moot for many taxpayers after this year. The TCJA generally eliminates the alimony deduction for payors, and the corresponding income inclusion for recipients, for divorces and separation agreements executed (i.e., coming into legal existence under a court order) after 2018.
Note, however, that the TCJA changes do not apply to existing divorce and separation agreements. In addition, if a prior agreement is modified after 2018, deductions are still available unless the modified agreement expressly states that the TCJA changes are applicable.
The tax law changes will likely become a bargaining chip in proceedings taking place at the end of the year. For instance, the parties may agree to finalize a divorce before 2019 to ensure deductible alimony payments. On the other hand, a divorce decree may not be executed until next year so the recipient will not owe tax on the payments.
Another possible idea is to arrange a lump-sum payment before 2019 instead of spreading out payments over a period of time. In this case, the one-time alimony payment is deductible by the payer, and taxable to the recipient, on a 2018 return.
These issues may be further complicated by state law. In some states, there is a waiting period before a divorce can be finalized. For example, a 60-day waiting period may preclude alimony deductions if an agreement is not finalized in time.
Summary: Obtain expert advice. Coordinate the tax issues with your JMF professional advisers, including your attorney.
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