The new Tax Cuts and Jobs Act (TCJA) goes into effect for the 2018 tax year, and parents who pay and receive alimony should know how the new tax law affects them. Previously, divorced individuals who paid alimony to ex-spouses could count these payments as tax deductions, and recipients had to report alimony as taxable income. Under the new tax law, alimony payments finalized on or before December 31, 2018 will follow these old standards and any payments made on January 1, 2019 or later will fall under the new tax law guidelines.
Individuals paying alimony under the old system are losing a potentially substantial tax deduction with this new law, and recipients cannot apply received alimony payments to their total taxable income after next year. The previous tax law incentivized higher-earning divorcing spouses to be more agreeable to the idea of paying alimony because of the significant tax deduction.
Info for Payers
If you pay alimony under a divorce agreement finalized on or before December 31, 2018 then you can still qualify for the tax deduction as long as you meet the requirements set forth under the old tax law. If you meet those requirements you can write your alimony payments off above the line and benefit from the tax deduction without needing to itemize.
The payer must have a written instrument that includes the divorce decree and any other maintenance or separation decrees for the couple’s divorce. Payments must also go to an ex-spouse or the payer must send them to another representative on behalf of the ex-spouse and the payer must clearly state each payment as alimony. Child support payments and property division payments do not count. Ex-spouses cannot file joint tax returns and cannot reside at the same primary residence, and the payer must make payments in cash or a cash equivalent to qualify for the tax deduction under the old rules.
Info for Recipients
If you receive alimony payments for a divorce finalized before 2019, you will need to continue reporting your payments as taxable income. Many individuals considering divorce are now using this new tax law to inform their decisions. For an ex-spouse who expects to receive alimony payments there is now an incentive to delay a divorce until after 2019 so the alimony will count as tax-free income. On the other hand, divorcing individuals who expect to pay alimony will want to finalize their divorces before 2019 to take advantage of the tax deduction under the old tax laws.
The new TCJA laws may lead to a lower tax obligation for recipients of alimony by placing them in a lower income bracket. Previously, the amount received in alimony could bump a recipient up to the next tax bracket, resulting in a lower overall return. If you are curious about how the new tax law will affect your existing divorce agreement or how it could impact a divorce in the near future, an accountant can shed light on your tax and income concerns.
Do I Need an Attorney?
It may be beneficial to have your accountant review your past years’ taxes to give you an idea of how much the new tax laws will affect you if you make or receive alimony payments. An attorney can help you expedite a divorce as much as possible, but any divorce has the potential to drag on for months or longer.
An experienced divorce attorney can help you make the most of a difficult situation and help ensure a fair and reasonable divorce agreement between you and your ex. Wealthier couples are more likely to need tax advice for an impending divorce because the TCJA will affect their finances and tax issues the most. Unfortunately, the new tax law puts payers and payees at odds when it comes to the timing of finalizing their divorces.
