In divorce situations, one spouse or ex-spouse may become legally obligated to make payments to the other party. Since these payments are often substantial, locking in tax deductions for the payer has often been a substantial issue. Before the new Tax Cuts and Jobs Act (TCJA), payments that met the tax-law definition of alimony could always be deducted by the payer for federal income tax purposes. And recipients of alimony payments always had to report the payments as taxable income.
This old-law treatment continues for alimony payments made under pre-2019 divorce agreements. But for payments made under post-2018 agreements, things will change dramatically. Here’s the story.
TCJA eliminates deductions for alimony payments required by post-2018 divorce agreements
For payments required under divorce or separation instruments that is executed after Dec. 31, 2018, the new law eliminates the deduction for alimony payments. Recipients of affected alimony payments will no longer have to include them in taxable income.
This TCJA treatment of alimony payments will apply to payments that are required under divorce or separation instruments that are: (1) executed after Dec. 31, 2018 or (2) modified after that date if the modification specifically states that the TCJA treatment of alimony payments (not deductible by the payer and not taxable income for the recipient) now applies.
For individuals who must pay alimony, this change can be expensive–because the tax savings from being able to deduct alimony payments can be substantial.
No change in tax treatment for payments required by pre-2019 divorce agreements (business as usual)
There’s no change in the federal income tax treatment of divorce-related payments that are required by divorce agreements that are executed before 2019. However, for these payments to qualify as deductible alimony, payers must still satisfy the time-honored list of specific tax-law requirements. If those requirements are met, alimony payments can be written off above-the-line on the payer’s federal income tax return. That means the payer does not have to itemize to benefit from the deduction. Payment recipients must include alimony payments that are required by divorce agreements executed before 2019 in their taxable income. So this is a continuation of business as usual.
When payments fail to meet the tax-law definition of alimony, they are generally treated as either child support payments or payments to divide the marital property. Such payments represent nondeductible personal expenses for the payer and tax-free money for the recipient.
Requirements for deductible alimony
Whether payments required by pre-2019 divorce agreements qualify as tax-deductible alimony or not is determined strictly by applying the applicable language in our beloved Internal Revenue Code and related regulations. In general, what the divorce decree says and what the divorcing couple might intend does not matter. For a particular payment required by a pre-2019 divorce agreement to qualify as deductible alimony, all the following requirements must be met.
1. Written instrument requirement
The payment must be made pursuant to a written divorce or separation instrument. This term includes divorce decrees, separate maintenance decrees, and separation instruments.
2. Payment must be to or on behalf of spouse or ex-spouse
To qualify as deductible alimony, a payment must be to or on behalf of a spouse or ex-spouse. Payments to third parties, such as attorneys and mortgage lenders, are permitted if they are made on behalf of a spouse or ex-spouse and pursuant to a divorce or separation agreement or at the written request of the spouse or ex-spouse.
3. Payment cannot be stated to not be alimony
The divorce or separation instrument cannot state that the payment in question is not alimony or effectively stipulate that it is not alimony because it is not deductible by the payer or not includable in the payee’s gross income.
4. Ex-spouses cannot live in same household or file jointly
After divorce or legal separation has occurred, the ex-spouses cannot live in the same household or file a joint return for payments to qualify as deductible alimony.
5. Cash or cash equivalent requirement
To be deductible alimony, a payment must be made in cash or cash equivalent.
6. Cannot be child support
To be deductible alimony, a payment cannot be classified as fixed or deemed child support under the alimony tax rules. The rules regarding what constitutes child support–especially what constitutes deemed child support–for this purpose are complicated and represent a nasty trap for unwary taxpayers. Contact a tax professional if your proposed divorce agreement includes payments that you intend to be alimony as well as payments that you intend to be child support.
7. Payee’s Social Security number requirement
For the payer to claim an alimony deduction for a payment, the payer’s return must include the payee’s Social Security number.
8. No obligations for payments to continue after recipient’s death
The obligation to make payments (other than payments of delinquent amounts) must cease if the recipient party dies. If the divorce papers are unclear about whether or not payments must continue, applicable state law controls. If under state law, the payer must continue to make payments after the recipient’s death (to the recipient’s estate or beneficiaries), the payments cannot be deductible alimony. In other words, the payment obligation must cease if the recipient party dies in order for the payment to qualify as deductible alimony. Failing to meet this requirement for payments to cease if the recipient dies is the most common reason for lost alimony deductions.
The last word
If you are currently in divorce proceedings and will be paying your soon-to-be-ex-spouse, you won’t be able to deduct any of those payments as alimony, thanks to the TCJA. On your soon-to-be-ex’s side of the deal, he or she won’t have to treat any of the payments as taxable income. So tax-wise, this is a financial loss for you and a windfall for the other party. Take that into consideration when negotiating your divorce agreement.
On the other hand, if you are paying your ex under a pre-2019 divorce agreement, nothing has changed. But your payments must meet all the aforementioned rules to be tax-deductible alimony.
This story has been updated.
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