Tax Reform & Alimony

What are the alimony payment tax consequences under current tax law?

Under current law, alimony payments are deductible by the payor-spouse and included in the gross income of the recipient, payee-spouse. In other words, the payor-spouse can deduct alimony payments from gross income and the alimony recipient must pay income taxes on that money.

To    illustrate,    if    Payor    makes    $100,000    per    year    and    is    ordered    to    pay    $20,000    in    alimony    to    Payee,    Payor    may    deduct    $20,000    from    Payor’s    gross    income,    giving    Payor    an    adjusted    gross    income    of    only    $80,000.    If    Payor    is    in    the 33%    tax    bracket,    that    $20,000    tax    deduction    translates    into    an    additional    $6,600    tax    refund    at    the    end    of    the   year.  In effect,    Uncle    Sam    is    paying    $6,600    of    Payor’s    alimony    obligation    and    Payor    is    paying    $13,400    of    the    $20,000    alimony obligation.    Payee,    the    recipient,    must    then    include    that    $20,000    in    Payee’s    gross    income.

What are the tax consequences of the new alimony provision?

Under the new bill, alimony payments will no longer be deductible by the payor spouse, and will no longer be includible in the gross income of the recipient, payee spouse. This provision applies to: (1) all divorce and separation agreements executed after December 31, 2018, and (2) divorce or separation agreements modified after December 31, 2018 only if the modification expressly provides that the amendment will apply.

The payor-spouse, no longer able to deduct alimony payments, may be pushed into a higher tax bracket. The consequences of which are tremendous: the payor may become ineligible for certain deductions and credits due to the payor’s increased income (i.e. the American Opportunity Credit, Lifetime Learning Credit, Coverdell Savings Accounts, ineligibility to contribute to a Roth IRA, etc.).

The bill incentivizes high-wage-earner-spouses contemplating a divorce to act quickly and get divorced prior to December 31, 2018 so that they will be able to deduct any future alimony payments from their gross income. In direct contrast, the bill incentivizes lower-wage-earner-spouses to postpone divorce or to drag on the process so that their divorce or legal separation is finalized after December 31, 2018, as the recipient will not have to include alimony payments in their gross income.

If I am already divorced or will be divorced before December 31, 2018, how does this reform affect me?

If you are divorced or separate prior to December 31, 2018, the new alimony provision does not affect you (unless you expressly modify your agreement after December 31, 2018 to include it).

What about Child Support payments?

Under both the current law and the new tax bill, child support payments are tax-neutral: the payments are not deductible by the payor and not includable in the payee’s gross income.

[1] IRC §215; IRC §71.

[1] Under current law, divorcing spouses are also free to designate that payments otherwise qualifying as alimony payments shall be non-deductible by the payor and excludible from gross income by the payee by providing so in their divorce or separation agreement.

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