Tax Reform and Alimony Payments

Under 26 USC 71: Alimony and Separate Maintenance Payments, “gross income includes amounts received as alimony or separate maintenance payments.” With the new Tax Cuts and Jobs Act, this alimony deduction is eliminated on all divorces entered into after 2018.

Many believe that this major change to the 75-year old alimony deduction comes as a result of the discrepancies consistently seen between the number of payers who deduct alimony paid on their return vs. the number of recipients who claim the income received on their return.

What does this mean for Taxpayers who are divorced, are getting divorced, or who may divorce in the future?

For Taxpayers who are already divorced and paying alimony, the payer will be able to continue to deduct the alimony payments and the recipient will need to continue to report the alimony received as income.

For Taxpayers who are considering divorce or who are currently pursuing a divorce, so long as the divorce is final by 12/31/2018, the payer will be able to continue to deduct the alimony payments and the recipient will need to continue to report the alimony received as income For Taxpayers divorced after 12/31/2018, alimony will NOT be deductible by the payer and will NOT be considered income for the recipient.

This change has the potential to mean LESS money is available to pay a spouse via alimony because MORE money will go to the IRS instead. Alimony is meant to help lessen the income gap between divorcing spouses. Shifting the taxation to the payer whose income would be taxed at a higher rate than the recipient means more tax will be paid. Because of this, we expect to see a change in the way divorce attorneys and courts determine alimony amounts, property settlements, and more.