Alimony Treatment Reversed by the New Tax Cuts and Jobs Act
February 5, 2018
Contemplating a divorce or separation in 2018? Make sure you are aware of the tax treatment changes enacted by the TCJA. Learn more now in the following SC&H Group blog post.
Individual taxpayers contemplating divorce and legal separations should take note of changes to the tax treatment of alimony made by the Tax Cuts and Jobs Act (TCJA).
For divorces entered into after December 31, 2018, alimony will no longer be deductible by the paying spouse, or taxable to the receiving spouse.
Under the current rules, an individual who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction. An “above-the-line” deduction is a deduction that a taxpayer doesn’t need to itemize to claim, and is more valuable for the taxpayer than an itemized deduction.)
And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse (and should be included in that spouse’s gross income).
Under the TCJA rules, there is no alimony deduction for the payer. Furthermore, alimony is not considered as gross income to the recipient. This means for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments. Similarly, the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them. Therefore, alimony will be treated similar to child support: nondeductible and nontaxable.
It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019. Existing divorces are considered “grandfathered”, which means they will not be affected by the new TCJA tax treatment.
Some taxpayers may want the TCJA rules to apply to their existing divorce or separation. Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree, unless the modification expressly provides that the TCJA rules are to apply. There may be situations where applying the TCJA rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.
Please note that the tax rules for child support are unchanged by the TCJA − payers of child support don’t get a deduction, and recipients of child support don’t have to pay tax on those amounts.
Do you have any questions about the TCJA, or need assistance if you are contemplating the financial implications of a separation or divorce? Please contact us if you have any questions as you navigate tax planning for 2018 and beyond.