Beginning in 2019 The Tax Cuts and Jobs Act made changes to the tax treatment of alimony. Learn if your finances will be impacted by these changes.

For divorce agreements entered into after December 31, 2018, or pre-existing agreements that are modified after that date to expressly provide that alimony received is not included in the recipient’s income, alimony will no longer be deductible by the payer and won’t be income to the recipient.

This is a dramatic difference to the treatment of alimony payments under decrees entered into and finalized before the end of 2018, for which alimony will continue to be deductible by the payer and income to the recipient.

Having alimony treated one way for certain taxpayers and the exact opposite for another group of taxpayers seems unfair and may eventually find its way into the courts. However, for the time being, parties to a divorce need to be aware of the change and provide for it in their divorce negotiations.

Requirements for Deductible Alimony

This is not the first time Congress has tinkered with alimony. Way back in the mid-1980s, the definition of alimony was altered to prevent property settlements and child support from being deducted as alimony. Under the definition of alimony since then, payments:

  • Must be in cash, paid to the spouse, the ex-spouse, or a third party on behalf of a spouse or ex-spouse, and the payments must be made after the divorce decree. If made under a separation agreement, the payment must be made after execution of that agreement.
  • Must be required by a decree or instrument incident to divorce, a written separation agreement, or a support decree that does not designate payments as non-deductible by the payer or excludable by the payee. Voluntary payments to an ex-spouse do not count as alimony payments
  • Cannot be designated as child support. Child support is not alimony.
  • Are valid alimony only if the taxpayers live apart after the decree. Spouses who share the same household can’t qualify for alimony deductions. This is true even if the spouses live separately within a dwelling unit.
  • Must end on the death of the payee (recipient) spouse. If the divorce decree is silent, courts will generally consider state law, and where state law is vague, judges may make their own decision based on the facts and circumstances of the case.
  • Cannot be contingent on the status of a child. That is, any amount that is discontinued when a child reaches 18, moves away, etc., is not alimony.

Taxable alimony payments under pre-2019 decrees and agreements are treated as earned income for IRA contribution purposes, allowing the spouse receiving the alimony to make IRA contributions based upon the alimony. The ability to make IRA contributions under pre-2019 decrees and agreements remains unchanged. However, for alimony received as a result of a post-2018 decree or agreement, the alimony can no longer be used as a basis for making an IRA contribution.

A CPA in Boca Raton Can Help With Your Tax Issues

If you have questions related to alimony or other tax issues you should speak with a CPA in Boca Raton at East Coast Tax Consulting. Call 561-828-9303 today to schedule an appointment.