Federal lawmakers dramatically changed the tax treatment of alimony with the passage of tax reform laws in 2018. The previous rule had been that a person paying alimony was entitled to a federal income tax deduction. However, Congress got rid of the deduction, beginning for couples who divorce in 2019.
Broadly speaking, the federal government now takes a bigger chunk of taxes from a divorced couple than it used to, which changes the alimony and tax dynamic. Some divorce lawyers believe that the change makes it more difficult to negotiate divorce agreements.
The Alimony Tax Rule Change
The change went into effect on January 1, 2019. For divorces after this date, the alimony payer can't take a federal income tax deduction for the payments. The alimony recipient doesn't have to pay federal income taxes on them.
The rule doesn't apply to everybody. Former spouses are grandfathered into the old rule if they divorced or signed a separation agreement before January 1, 2019, and meet certain requirements. For qualifying divorces, the alimony payer can take a federal income tax deduction for as many years as the alimony payments continue. However, the payments are treated as income for the recipient spouse.
What It Means for Alimony Recipients
The new rule can have pluses and minuses for alimony recipients. The good news is that they no longer have to pay taxes on the spousal support payments they receive. However, it may be more difficult for an alimony recipient to negotiate an advantageous divorce settlement because the rule leaves the divorced couple with fewer dollars between them.
In other words, there is less money to go around because having the deduction usually resulted in a net tax savings for the divorced couple.
How does that work? Consider a spouse who pays $30,000 in alimony and whose income is taxed at 32%. A tax deduction would save this spouse almost $10,000 in taxes. Even if the other spouse had to pay income taxes on the alimony at 22%, the divorced couple would likely end up ahead.
Are There Any Tax Benefit Alternatives?
After Congress eliminated the alimony tax deduction, creative accountants have looked for loopholes. In some cases, it may be possible to reduce the effects of losing the alimony deduction by making spousal support payments from an individual retirement account (IRA).
Alimony may be treated differently on your state tax return. Talk to a local attorney for any questions about how your state tax laws could treat alimony payments.
Divorces Before 2019 Can Still Qualify
If you divorced before 2019, you may still be able to take tax deduction advantages. However, be cautious about modifying your spousal support agreement. You wouldn't want to accidentally lose your alimony tax deduction benefit. Before making changes to a pre-2019 agreement, it is advisable to consult an attorney with expertise in tax matters.
Even if you are grandfathered in, you won't qualify for an alimony deduction unless you meet all the requirements mandated by the Internal Revenue Service (IRS), including:
- You don't file a joint return with your former spouse
- Your alimony payment is in cash (including checks or money orders)
- The divorce or separation agreement does not say the payment is not alimony
- Your payment is not treated as child support or a property settlement
- The payor is not liable to make alimony payments after the death of the recipient spouse
- If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment
Problems with Alimony and Taxes? Get a Lawyer's Help Today
Both taxes and divorce are complicated subjects, and they become more complex when they're mixed together. If you have questions about alimony and taxes, it's a good idea to contact a local divorce attorney to discuss your specific situation and receive personalized legal advice.