For those finalizing divorces after December 31, 2018, the Tax Cuts and Jobs Act (TCJA) of 2017 will change how alimony is treated on your federal income tax return. If you stand to benefit from the earlier tax laws for alimony, you may want to speed your divorce agreement along so that it’s settled before the end of the year.
Alimony, also known as spousal support or spousal maintenance, is when a portion of one spouse’s income is delivered to the other spouse by court order. Under previous tax law, alimony payments were considered tax-deductible for the payer. This was a significant distinction because such payments are often substantial. The spouse who received alimony, on the other hand, was required to report the payments as taxable income.
Under the TCJA, the tax treatment of alimony is changing. Here’s how:
If your divorce is finalized prior to December 31, 2018, your tax treatment will stay the same. Payers will be able to claim alimony as a tax deduction, and recipients will need to claim alimony as taxable income. Because alimony recipients typically have less income than alimony payers, the overall tax paid on the alimony is less. As before, please note that the alimony payments will need to meet the tax-law definition of alimony in order to be considered alimony on your federal tax return.
If your divorce is finalized after December 31, 2018, your tax treatment will be different. Those who pay alimony will no longer be able to claim those payments as a tax deduction, and will likely have a much higher tax burden. Those who receive alimony, on the other hand, will no longer be required to file it as taxable income.
The TCJA may also affect all modifications to divorce agreements made after 2018 if the modification states that the TCJA treatment of alimony payments now applies.
What do these tax changes mean for you?
If you are considering a divorce or in the process of a divorce agreement, give some thought as to how the new tax act will affect you. Is it likely that you will be required to pay spousal support? If so, it will be in your best interest to finalize the divorce settlement before the end of 2018. This is especially true if your alimony payments are likely to be substantial.
If you are likely to be awarded alimony, on the other hand, it may be in your best interest to wait until 2019 for a final divorce agreement. That way, you won’t be required to pay income taxes on your spousal support each year.
If you are seeking any modifications to your divorce settlement, you may wish to work around the 2018 deadline as well. If you are required to pay alimony, try to modify your agreement as quickly as possible. If you currently receive alimony, you may wish to wait until January to begin the process of renegotiation.
Learn how the IRS defines payments as alimony or non-alimony here.
If you have any questions about how your current or future divorce agreement may be affected by the TCJA, call us today for a personal consultation.