Big deadline approaching related to Alimony
Bruce D Claassen
December 6, 2018
The Tax Cuts and Jobs Act has changed how alimony will be treated for tax purposes to both spouses in a divorce. For divorce decrees executed on or before December 31, 2018, alimony is generally deductible to the payer, and taxable to the percipient. There are a number of requirements that must be met for payments to qualify as alimony under the tax law:
• No voluntary payments: For an alimony payment to be deductible, it must be required by a divorce or support decree or a written separation agreement.
• Cash only: Only payments of cash qualify as deductible alimony. The cash can be paid either directly to the spouse or can be paid on the spouse's behalf under the terms of the instrument to cover an expense such as rent or the mortgage.
• Payments to stop at death: For the payments to qualify as alimony, the payments must be required (under the instrument or by law) to stop when the spouse dies. Many individuals seek to have the payments stop at the remarriage of the spouse as well. This won't prevent deductibility, but isn't a requirement for deductibility. (Note: if the payments are to continue after the spouse dies, then none of the payments—including those made while the spouse is alive—are deductible.)
• Separate living arrangements: If you're making payments under a divorce decree, you must be living apart from your spouse for the payments to qualify as alimony.
• Distinguish child support: Payments made for child support are not deductible. This includes payments clearly fixed in the instrument as child support. It also includes, however, payments which the instrument calls alimony but which are linked to a contingency relating to the child. For example, if the “alimony” required to be paid monthly is $1,500, but drops to $1,000 in (or near) the month in which the child becomes 18, the “extra” $500 a month will be treated as nondeductible child support.
For divorce decrees executed after December 31, 2018, the tax law changes the tax treatment. Alimony paid under a decree executed after 2018 is not deductible to the payer, nor is it taxable to the recipient. This can obviously have a pretty big impact on both parties’ tax situations. The higher your income is, the bigger the tax affect, since your tax rate will be higher.
If you’re settling a divorce in the near future, you may want to have a conversation with your legal counsel regarding the timing. Sometimes this is out of your hands, as court dockets can dictate the timing for you. There is an obvious conflict between what’s good for the payer and what’s good for the recipient, so negotiation may be in order.
If you have questions about this tax law change, and how it may affect you, or how you can use it to your advantage, please contact us.