Current Tax Law 

There are many questions surrounding the new tax law and how it impacts alimony payments.  Under the current law, alimony is tax deductible by the spouse paying it and is included as taxable income to the spouse receiving it. The current law is active in all divorces settled on or before December 31, 2018.

New Tax Law 

The new Tax Cut Jobs Act (TCJA) changes the rules for alimony payments.  For divorces settled on or after January 1, 2019, the current law is reversed.  Alimony is no longer tax deductible by the paying spouse and is not included in taxable income to the receiving spouse.  When a pre-2019 divorce is not modified, the old tax law remains in effect (i.e. the receiving spouse claims the alimony as taxable income and the paying spouse continues to get the deduction).  The law assumes the parties bargained for alimony based on the current law and does not change the tax treatment of the payments.

Important Distinction for Modifications

So what about modifications to alimony made AFTER January 1, 2019?  The new law requires the parties to specifically choose whether or not pre-2019 modifications will be subject to the TCJA.  In other words, you have to opt-in to the TCJA.  The parties have the power to choose how payments are treated tax-wise after 2019.  A mistake in this area could be extremely costly!

8 Requirements for Deductible Alimony

Alimony payments must still meet the 8 requirements listed in the Internal Revenue Code to be treated as tax deductible alimony.  The intentions of the spouses and even language in the MDA does not override the tax code requirements.  Payments that do not meet all 8 requirements are often treated by the IRS as payments to divide marital property or child support.

1. Written Instrument, not an oral agreement
2. Must be to or on behalf of a spouse or ex-spouse (not third parties)
3. Cannot be stated it is “not alimony”
4. Ex’s cannot live together or file joint tax returns
5. Must be cash or a cash equivalent
6. The social security number of the receiving spouse (payee) must be on the tax return
7. Cannot be child support
8. Payment obligation must end at the recipients death (or sooner)

Final Thoughts on Alimony

If you want tax deductible alimony, there is a huge incentive to finish divorce proceedings before December 31, 2018.  For Tennessee clients, there is a 90 day waiting period to get divorced if the parties have joint minor children and a 60 day waiting period for a divorce if you do not have minor children together.  Most courts shut down the last week of the year for the holiday, which means spouses that want tax deductible alimony need to file well before the fourth quarter.

If you do not want to pay taxes on alimony you are receiving, there is a huge incentive to delay your divorce until after January 1, 2019 (the courts are closed anyway).

Please consult with your tax professional before signing your divorce papers, or you may have to live with a mistake for years to come.