16 Jan 2018 New Tax Treatment for Alimony Payments Will Take Effect in 2019
Among the many tax deductions that Congress eliminated from the federal tax code is the deduction for alimony payments. Alimony is generally used to provide ongoing financial support to the lower income spouse following a divorce. The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, will end the alimony-payer deduction and the payee’s income inclusion for post-2018 divorces and separations.
Under the new TCJA rules, the party paying alimony will no longer receive a deduction and the party receiving alimony will no longer have to report it as income. Moreover, the tax rules for child support remain unchanged under the TCJA. The payers of child support do not get a deduction, and the recipients of child support do not have to report those amounts as income.
Under the pre-TCJA rules, an individual who pays alimony can deduct an amount equal to the alimony paid during the year as an “above-the-line” deduction and the alimony paid is taxable income to the recipient spouse. The alimony deduction enables divorced families to be able to support two households on the same income that married couples use to support one household by shifting the income to the spouse in a lower tax bracket.
Without the alimony deduction, there will be a larger portion of the income going to the government and a smaller portion of the income will be allocated between the two households. This creates the concern that the elimination of the alimony deduction will have a chilling effect on divorce settlements, result in lower alimony awards, and decrease the divorced couple’s standard of living.
It is important to emphasize that the TCJA rules do not apply to existing divorces and separations. The pre-TCJA rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019. Under a special rule, however, taxpayers may voluntarily elect to apply TCJA rules to their existing divorce or separation.
In the past, the alimony deduction has made paying alimony more palatable to the higher income spouse. This means the ability to deduct alimony payments has helped ease the financial burden on divorced families by facilitating a mutually beneficial settlement. Thus, many tax and legal practitioners have expressed strong opinions about its elimination as a matter of public policy.