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.
 IRC §215; IRC §71.
 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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