Alimony tax changes are now in effect

For family law attorneys, 2019 is a year of change when it comes to spousal support.  Prior to January 1, 2019, a person who paid spousal support to his or her ex-wife or ex-husband had the ability to deduct the support paid on his or her taxes.  The ex receiving spousal support had to include those payments on his or her taxes as income.  Typically, it is the high income spouse that ends up paying spousal support to the low income spouse, so being able to deduct spousal support on one’s taxes was a great benefit to the payer.  If the parties agreed to it, they could forgo including the spousal support as income and as a deduction, but this was not common practice.

 

Thanks to the Tax Cuts and Jobs Act (TCJA) of 2017, specifically Section 11051, “Repeal of Deduction for Alimony Payments,” alimony is no longer tax deductible and is no longer included as income.  The law applies to all divorces and separate maintenance agreements entered with the court after December 31, 2018, Unallocated support (a type of combination support that was both for the children and the spouse) is no longer deductible under the TCJA of 2017.  According to the IRS, approximately 600,000 taxpayers took advantage of the old law.

 

As you would imagine, we saw a significant increase in cases being finalized in the months leading up to the end of 2018.  Payers naturally wanted to push the divorce through in order to be able to finalize it by the drop dead date of December 31, 2018, so they could still write alimony paid off on their taxes.  Recipients, however, were more inclined to take a relaxed approach, knowing that pushing the finalization of the divorce beyond the end of the year meant they did not have to claim any spousal support as income.

 

Child support remains the same as before – it’s not tax deductible and not included in the recipient’s income.  If you were divorced prior to January 1, 2019, and had taken advantage of the tax deductible/tax includable spousal support law, you are still “grandfathered” in and the new law will not impact you.  The TCJA of 2017 also mentions changes to orders entered before 2019, stating that the “amendments made by this section shall apply to….(2) any divorce or separation instrument (as so defined) executed on or before such date [December 31, 2018] and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.”

 

The new law may make negotiations of final settlements a bit harder to come by.  Some have suggested that any alimony paid will simply take into account the tax consequences for the parties and adjust the amount paid accordingly.  I’ve also read that another option may be for the higher income spouse to pony up more money from his or her IRAs as a form of lump-sum alimony, as withdrawing this money would cause the higher income spouse to pay taxes on it.  By giving the IRA to the ex spouse, the higher income spouse is eliminating that tax consequence for himself or herself.

I always tell people that I am not an accountant, and they should consult with a trusted expert to ensure they are protecting themselves the best way they can.  I would especially emphasize this point when dealing with alimony and finalizing your divorce in 2019.