As of January 1, 2019, alimony payments will no longer be tax deductible to the payor associated with divorce and separation agreements. Additionally, future alimony recipients will not have to report the payments as income for tax purposes. Tax treatment of alimony will now be similar to that of child support.
Alimony Payment Basics
Alimony is a form of financial support where one spouse earns far more than the other spouse when a couple divorces. The higher earning spouse will often be ordered by the court to make payments for a set period of years.
Alimony deductions reduce the overall cost of payment of a settlement, so alimony deductions are important when the paying spouse is short on liquid assets. They are also quite substantial.
Tax Deductions Will Still Be Available for Alimony Payments Paid As A Result of Agreements Signed in 2018
Under the Tax Cuts and Jobs Act (TCJA), deductions will still be available for alimony payments paid as a result of agreements signed in 2018. This means that couples seeking a divorce should be aware of this 2018 deadline. Payments required under divorce and separation agreements that are executed before December 31, 2018 can be tax deductible.
Alimony payments agreed to prior to this date must still meet the other federal income tax requirements for alimony. If they fail to meet the requirements, they are generally treated as either child support payments or payments stemming from the division of marital property. These are generally nondeductible personal expenses for the payer and do not need to be taxed on the recipient’s end.
Consequences For Both Spouses
This can be problematic for both spouses because the payor and payee typically are in different tax brackets. One spouse might be more likely to seek lower alimony payments because the lack of tax deduction available leads to more expensive payouts. Thus, payments to lower-earning spouses are likely to shrink.
With no alimony deduction comes a decreased opportunity to negotiate a lower lump-sum payment in divorce settlements.