Alimony Considerations After the Tax Cuts and Jobs Act
Posted on 07/05/2018 at 01:57 PM by Mary Zambreno
The year 2018 is more than halfway over and that means new alimony rules imposed under the Tax Cuts and Jobs Act (TCJA) will soon take effect – and that could be good news or bad news, depending on the spouse’s situation.
Prior to the TCJA, if a payment from one spouse to the other met the definition of alimony, the payor could deduct from his or her income the amount of alimony paid, while the recipient had to include that payment as part of his or her taxable income.
According to the IRS, a payment from one spouse to another constitutes alimony if:
- The spouses do not file a joint return with each other;
- The payment is in cash (whether paid by check or money order or wire transfer, etc.);
- The payment is made pursuant to a divorce or separation order;
- The divorce or separation order does not designate the payment as “not alimony”;
- The spouses are not members of the same household;
- The payment terminates upon the death of the recipient spouse;
- The payment is not child support or a property settlement.
The deductibility of alimony was often good news to the payor because that alimony deduction could mean the difference between tax brackets. It was a serious consideration for family law attorneys everywhere when structuring settlements because it dictated how much actual cash flow could be available to the parties after taxes.
Without the deduction, the payor’s total taxable income, and therefore, tax, increases.
The Tax Cuts and Jobs Act eliminates the alimony deduction for payor spouses, while recipients of alimony will no longer have to include it as taxable income. This applies to divorce orders executed on January 1, 2019 or modification orders on or after that date if the modification states that the TCJA applies.
The TCJA incentivizes potential payors of alimony to reach a divorce agreement before the end of the year. Potential recipients of alimony may want to hold off until 2019 so that these alimony payments are non-taxable. Either way, family law litigants should be sure to consult with an experienced family law attorney who can recalibrate and restructure potential alimony payments after TCJA.
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.
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