Alimony & Spousal Support

Alimony Tax Changes May Affect Dynamics of 2018 Year End Divorce Proceedings

 Alimony Tax Changes Under The Tax Cuts & Jobs Act May Affect The Dynamics Of 2018 Year End Divorce Proceedings and Settlements

For years before the passage of the Tax Cuts and Jobs Act (“TCJA”), the payment of alimony would be deducted by the former spouse making the alimony payments for Federal income tax purposes and the payment would be reported as income for Federal tax purposes by the former spouse receiving the alimony payments.

However, with the passage of the TCJA, the way that alimony is treated for purposes of Federal income taxes has been drastically changed. Any divorce or separation instrument executed after December 31, 2018 shall be subject to the provisions of the TCJA which provides that the former spouse who is paying alimony is unable to deduct the payments for Federal income tax purposes and the former spouse receiving the alimony payments does not have to include the alimony payment in his/her income for Federal tax purposes. For income tax purposes, the new law puts alimony payments in line with child support payments.

Further, in order to qualify as tax deductible alimony under the TCJA for instruments executed prior to the December 31, 2018 deadline, all of the following requirements must be met for the payment:

  1. The payment must be made pursuant to a written divorce or separation instrument that was executed before the December 31, 2018 deadline;
  2. The payment must be to or on behalf of one of the spouses or former spouses;
  3. The written divorce or separation instrument cannot state that the payment is not alimony by stating it is not deductible or not includable in the receiving former spouse’s income;
  4. The spouses or former spouses cannot live in the same household or file joint tax returns;
  5. The payment between the spouses must be made by cash or cash equivalent;
  6. The payment cannot be written into the divorce or separation agreement labeled as child support;
  7. The tax return of the paying former spouse must include the receiving spouse’s Social Security Number; and
  8. The obligations to make the payment cannot continue after the receiving former spouse dies (unless it is the payment of delinquent amounts).

Most significantly, because the alimony payer is usually the higher income earner and in the higher tax bracket of the two parties, the changes under the TCJA could have a substantial impact on taxes that must ultimately be paid by that payer.

Due to these tax implications, if you are presently a party to a divorce proceeding or planning on filing for divorce, it may be in the best interest of the higher earning spouse to negotiate, finalize and execute a divorce or separation agreement before the December 31, 2018 deadline imposed by the TCJA. This will allow you to take advantage of the current laws which allow the alimony paying spouse to deduct the amount from taxable income thereby saving you income taxes and allowing more dollars to be available for the property settlement agreement.

That is to say it is in both parties’ best interest to finalize a property settlement agreement that is most tax efficient so that both parties can share the tax savings, especially since this tax planning technique to finalize a divorce agreement is not obtainable or at hand after December 31, 2018.

These changes under the TCJA as to how alimony is treated for Federal tax purposes will have a major impact on divorce and separation negotiations and litigation once they take effect after December 31, 2018. Our family law attorneys will continue to monitor the impact of the TCJA as it develops once the changes are implemented.

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