The Tax Cuts and Jobs Act implemented in December 2017 will cause dramatic changes to the tax treatment of alimony payments as of January 1st, 2019, effectively reversing the tax treatment of payments by payers and recipients. Here, we’ll provide an overview of how the new law will affect divorce or separation instruments, and how tax professionals can learn more about the law in order to provide the best service to clients.
Pre-2018 Tax Treatment
There will be no change in tax treatment for payments required by divorce or separation agreements entered on or before December 31st, 2018. Payers must satisfy specific tax-law requirements in order to deduct alimony payments on a federal income tax return, which are listed below:
- The spouses don’t file a joint return with each other;
- The payment is in cash (including checks or money orders);
- The payment is to or for a spouse or a former spouse made under a divorce or separation instrument;
- The divorce or separation instrument doesn’t designate the payment as not alimony;
- The spouses aren’t members of the same household when the payment is made;
- There’s no liability to make the payment (in cash or property) after the death of the recipient spouse; and
- The payment isn’t treated as child support or a property settlement.
Payments that fail to meet the requirements above are generally treated as child support payments or payments to divide the marital property. These are nondeductible personal expenses for the payer.
Alimony payment recipients must include the payments required by the divorce or separation instruments in their taxable income. Payments considered child support or the division of marital property are tax-free payments for the recipient.
2019 Tax Treatment
As of January 1st, 2019, the tax treatment of alimony payments changes dramatically. For divorce or separation instruments meeting the following criteria, the deduction is eliminated for alimony:
- Executed after December 31st, 2018 or
- Modified after December 31st, 2018 to specifically apply the Tax Cuts and Jobs Act treatment of alimony.
This means those who pay alimony can no longer deduct those payments from their taxable income. Alternatively, those who receive alimony payments do not have to include them in their taxable income. This is a big change compared to the previous tax applications of alimony payments, causing a shift in tax benefit from the payer to the recipient. Alimony payments by payers will now be taxed at the ordinary income level of the payee, which can be a substantial increase in taxes.
This flip of the treatment of alimony payments is likely to cause potential payers to want to implement instruments before December 31st, 2018 and potential recipients to want to implement instruments after December 31st, 2018. Tax and accounting professional working with divorce or separation instruments need to both understand how the tax treatment of alimony payments has changed, and how to counsel clients based on the change.
A More In-Depth View
The new Tax Cuts and Jobs Act treatment of alimony payments is complex, and those working directly with alimony will want to be experts at the change in order to provide the best tax benefits for their clients. To get a better understanding of alimony payment tax treatment, Surgent offers a Tax Treatment of Alimony Payments After the New Tax Law (ALIP) course which qualifies for 2 credits of Continuing Professional Education for both CPAs and EAs.
The course covers the basics of alimony and child support, how the new law will affect clients, and how practitioners can counsel clients on the treatment of divorce and separation instruments, both existing and into the future. If you are a tax professional working with clients who have or will have alimony payments, having an in-depth knowledge of the law is going to help you provide the best service to your clients. Surgent’s course will give you a strong knowledge of how to handle new and existing instruments, and prepare you take on the new law in the future.