The 2018 Tax Cuts and Jobs Act (TCJA) has changed the tax consequences of alimony payments.
The Old Rule and The New Rule
In some divorces, one party (the payor) is ordered to pay alimony to the other (the payee) after the divorce is final. Alimony payments are intended to ensure the payee maintains a similar quality of life as he or she had during the marriage. Generally, the alimony must be paid until the payee remarries, cohabitates with another partner, becomes self-supporting, or dies. Alimony payments have tax consequences for both the payor and payee; however, those rules are changing soon.
In divorces which occurred or settled before December 31, 2018, payments meeting the tax-law definition of alimony are deductible from the payor*s adjusted gross income. Those same payments are taxable income for the payee. The old rule gave payors an incentive to pay alimony because they could make a deduction, whether or not they itemized returns. Alimony payments which were agreed to or ordered prior to December 31, 2018 will remain under these rules. That is, alimony is deductible by the payor and the payee must report the alimony as income.
However, the TCJA changes this rule for post-2018 divorces. For divorces which are settled or finalized after December 31, 2018, alimony cannot be deducted by the payor. Likewise, the payee is not required to report the alimony payments as income. It is our current recommendation that anyone with pending alimony claims in 2018 seriously consider the future tax treatment in determining whether to settle a case before these changes takes effect. In addition, we must recommend that clients with pending alimony issues also consult with an accountant regarding the new law.
Exception to The Old Rule
The TCJA also creates an exception to the old rule: The TCJA will apply to alimony payments from a pre-2019 divorce only where the divorce is modified after December 31, 2018 and the modification specifically states the TCJA tax treatment of alimony payments now applies. We cannot be sure how these modification requests will be handled by Alabama courts because the law has yet to take effect. However, payees may want to consider filing a modification and requesting that the TCJA be applied to their case to alleviate the tax burden of pre-2019 alimony payments.
Are you confused yet? We don*t blame you. Consult with a qualified domestic relations attorney, as well as a certified public accountant, to discuss your options regarding past, pending, or future alimony.
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