If you or a client is going through a divorce or separation, do not forget to consider the changes enacted under the 2017 Tax Cuts and Jobs Act ("TCJA"). Under the TCJA, taxpayers can no longer take deductions for their alimony or separate maintenance payments for divorce or separation instruments that are: (1) executed after December 31, 2018, or (2) modified after December 31, 2018, if the modification specifically states that the TCJA treatment of alimony payments now applies.
Alimony was a rare exception to the general rule that all income is taxable. Under the previous law, a spouse who made alimony payments received a deduction for these amounts on his or her federal income tax return and the payee spouse had to include the alimony in his or her income. For individuals who must pay alimony, not being able to deduct alimony payments can be a substantial and expensive change and may lead to an even more contentious divorce. However, payee spouses will no longer have to report alimony payments as income.
There is no change in the federal income tax treatment of divorce-related payments that are required by divorce agreements that are executed before 2019, so taxpayers currently reaching divorce agreements which require them to pay alimony will want to get them done by December 31, 2018, while taxpayers receiving alimony payments will want to delay reaching an agreement until the new year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.