Divorced? What to Know About Alimony Tax Changes

Under the new tax law, alimony payments are no longer deductible or taxable transfers. Here’s an overview of the changes and what they mean for divorced couples as well as those considering a divorce.

Questions about Alimony Tax Changes

What’s Changing?

Under the Tax Cuts and Jobs Act, alimony payments will be ignored for tax purposes. The paying spouse will not receive a deduction for the payments, and the receiving spouse will not pay taxes on the payments.
Under the old tax law, the paying spouse could deduct the payments, while the receiving spouse paid income taxes on them.

Who Does It Affect?

Unlike other provisions of the Tax Cuts and Jobs Act, which took effect for 2018, the new rules for alimony won’t go into effect until 2019. If your divorce was or will be finalized on or before December 31, 2018, the old rules will continue to apply. If your divorce is finalized on or after January 1, 2019, the new rules will apply.
For modifications of divorce agreements that the old rules apply to, you will have an option. The default is that the old rules apply. However, you can opt into the new rules by specifically stating that you are in the modification.

What’s the Impact?

Under the new alimony tax rules, alimony payments will now cost the paying spouse more because of the lost deduction. The receiving spouse will also effectively receive more because payments are no longer taxed.

Further, the government will receive more in taxes because the paying spouse will usually be in a higher tax bracket than the receiving spouse.
This creates the possibility that divorce judges may order lower alimony payments than they would have before the tax changes. Further, divorcing spouses may wish to negotiate a larger property distribution in lieu of alimony payments to reduce the tax consequences.

Alimony Tax Changes and You

Changes in the alimony tax rules change the value of alimony payments. Be sure to take this into account before signing or modifying a divorce agreement. As with other important issues, it’s also probably a good idea to discuss this with your attorney and accountant.