How the New Tax Law May Affect Your Alimony Deductions
Uncontested Divorce Mediation
Posted March 14, 2019
If you and your spouse have been considering filing for divorce, it’s important to know about recent changes made to tax law that affect alimony payments. It is common for one ex-spouse to become legally obligated to make payments to the other ex-spouse as part of a divorce settlement. These payments, which are called alimony, are court-ordered to ensure that the spouse who was not the breadwinner in the marriage is able to maintain his or her quality of life in the aftermath of the divorce. In the past, alimony payments could always be deducted by the payer for federal income tax purposes, and recipients of alimony payments were always required to report the payments as taxable income. However, the new Tax Cuts and Jobs Act (TCJA) eliminates deductions for alimony payments required by all divorce agreements made after December 31, 2018. This means that not only will recipients of post-2018 alimony payments not have to include them in taxable income, but that payers will also no longer be able to use alimony as a tax deduction. This is a dramatic change from the old tax law, and can seriously affect the amount you will owe to the IRS.
If your divorce agreement was finalized prior to this date, nothing will change for you and your former spouse, unless any modifications specifically regarding alimony payments were made to your divorce paperwork in the new year.
Changes for Divorces Finalized After January 1, 2019
If you and your former spouse finalized a divorce on or after January 1, 2019, there are several things to know about the TCJA treatment of alimony and how it will affect you. For starters, this new law severely impacts the substantial tax savings that the alimony payer used to receive from being able to deduct it from his or her taxable income. However, this only pertains to divorce-related payments that qualify as alimony. Other types of court-ordered payments from one ex-spouse to another, such as child support or payments to divide marital assets, are not subject to the TCJA treatment of alimony, and are still fully tax deductible to the payer and tax-free income for the recipient.
Deductible Alimony Requirements
In order to determine whether payments required by divorce agreements filed prior to 2019 qualify as tax-deductible alimony, it’s essential for your tax specialist to review the Internal Revenue Code and related regulations to see if your payments fall under the official IRS definition of alimony. All of the following requirements must be met for a required payment made as a result of a divorce agreement filed before 2019 to qualify as deductible alimony.
- Written instrument requirement- The payment must be made in accordance with a written divorce or separation instrument., such as a divorce decree, separate maintenance decree, or legal separation instruments.
- Payment must be to or on behalf of former spouse- In order to qualify as deductible alimony, a payment must be made directly to or on behalf of an ex-spouse. Payments to third parties, such as attorneys, are allowed if they are made on behalf of a former spouse as part of a divorce or separation agreement, or at the ex-spouse’s written request.
- Payment cannot be stated to not be alimony- The payment in question must be stipulated as alimony in the pre-2019 divorce or separation instrument.
- Ex-spouses cannot live in same household or file jointly- Following a divorce or legal separation, you and your ex-spouse may not live in the same household, nor can you file a joint tax return for payments to qualify as deductible alimony.
- Cash or cash equivalent requirement- A payment must be made in cash or a cash equivalent to be considered deductible alimony.
- Cannot be child support- In order to qualify as deductible alimony, payments cannot be categorized as fixed or deemed child support under the alimony tax rules. Speak to your tax professional if your pending divorce agreement includes both specifically-designated alimony and child support payments, as this can be a tricky thing to navigate under tax law.
- Payee’s Social Security number required– The payer’s tax return must include the Social Security number of the recipient in order for the payer to claim an alimony deduction for a payment.
- No payment obligations after recipient’s death– The obligation to make alimony payments is discontinued if the recipient party dies. This does not include payments of delinquent amounts. This is an important distinction- failing to meet the requirement for cessation of payments in the event of the recipient’s death is actually the most common reason for lost alimony deductions.
If you are paying your ex-spouse alimony under a divorce agreement made before 2019, nothing will change, as long as your payments meet all the above guidelines to be considered tax-deductible alimony. However, for those who are currently in divorce mediation in Denver, keep in mind that you’ll no longer be able to deduct alimony payments, while the recipient of the payments will not be required to treat them as taxable income- it’s a huge financial hit for the payer and a big bonus for the payee.
Contact a Divorce Mediator in Denver Today
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