Under the new Tax Cuts and Jobs Act, alimony payments are no longer deductible by the payor-spouse and no longer includible in the income of the recipient-spouse. The new law is effective for divorce or separation instruments executed after December 31, 2018.
Under “old-law” treatment, payments that meet certain criteria are deductible by the payor-spouse and includible in the recipient-spouses income. This old-law treatment will continue for alimony payments made subject to a pre-2019 divorce agreement. For payments required by a pre-2019 divorce agreement to qualify as deductible alimony, all the following must be met:
- 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.
- 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.
- 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.
- 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.
- Cash or Cash Equivalent Requirement
To be deductible alimony, a payment must be made in cash or cash equivalent.
- 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.
- 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.
- No Obligations for Payments to Continue after Recipient’s Death
The obligation to make payments must cease if the recipient party dies. If the divorce papers are unclear about whether payments must continue, applicable state law controls.
If you are currently going through divorce proceedings and want deductible alimony treatment for some or all of the payments that will be made to the other party, the TCJA gives you a big incentive to get your divorce agreement wrapped up and signed by 12/31/18. Doing so will allow you to deduct the qualified payments that you make to the recipient-spouse.
On the other hand, if you will be the recipient of alimony payments, you have an incentive to put off finalizing your agreement until next year (post-2018), because the payments will be tax-free income to you.
Contact Wicks Emmett for help determining the most tax advantageous arrangement for your situation. Waiting too long for tax advice from a qualified professional could turn out to be an expensive mistake.