In divorces, an ex-spouse may be legally obligated to make payments to his or her former significant other. Payments often are substantial and have been locked into tax deductions for the payer — but that was before the Tax Cuts and Jobs Act came to pass. It used to be that bona fide alimony payments were deductible, and the recipient reported the money as taxable income. For divorce agreements executed in 2018 or earlier, the old rules still apply.
However, for payments made under agreements after 2018, dramatic changes have ensued.
- The tax deduction for alimony payments is eliminated.
- Alimony recipients won’t have to pay tax on alimony received.
- If your agreement is modified after Dec. 31, 2018, and states that the new TCJA treatment applies, the new tax rules apply.
That last item is especially significant. As noted in the legal site Nolo, pre-2019 divorces are eligible to for conversion to the new rules to future payments, but this is not mandatory. “The modification must specifically state that the TCJA treatment of alimony payments (not deductible by the payer and not taxable income for the recipient) applies.” In some situations, the new TCJA rules could benefit both ex-spouses, as when the recipient is now in a higher tax bracket than the payer-spouse.
Rules Under the Old System
Even for those operating under pre-TCJA rules, for a particular payment to qualify as deductible alimony for federal income tax purposes, it must meet a number of requirements, including:
- The payment must be made under a written decree of divorce, separate maintenance or separation. In other words, it has to have been written down.
- The payment must be to, or on behalf of, a spouse or an ex-spouse. Payments to another, such as an attorney, are fine if they’re made under the divorce or separation agreement or at the written request of the spouse or ex-spouse.
- The divorce or separation instrument can’t state that the payment isn’t alimony because it isn’t deductible by the payer or won’t be included in the payee’s gross income.
- After the divorce or legal separation, the ex-spouses can’t live in the same household or file a joint tax return.
- Payments must be made in cash or a cash equivalent.
- Payments can’t be classified as fixed or deemed child support. This is another tax situation, which is why it must be considered separately from alimony.
- The obligation to make payments, other than payment of delinquent amounts, must cease if the recipient dies. State law applies if the divorce papers are unclear about whether payments must continue to the estate and eventually to beneficiaries of the estate. If, under state law, the payer must continue to make payments after the recipient’s death, the payments can’t be alimony. (This is a major reason why recipients lost their alimony deductions.)
This is just an introduction to a complex topic, and as you can see, there are a lot of pitfalls. A small mistake can cost thousands of dollars. Contact us if your proposed divorce agreement includes payments meant to be alimony or child support. We’ll guide you to keep you from making an expensive tax mistake you’ll have to live with for years, keeping in mind both federal laws and the rules in your state.