Taxpayers should be aware of tax law changes related to alimony and separation payments. These payments are made after a divorce or separation. The Tax Cuts and Jobs Act changed the rules around them, which affects certain taxpayers when they file their 2019 tax returns and beyond.
Key Facts About Divorce and Taxes
Here are some facts that will help people understand these changes and who they will impact:
Payments Covered Under the Law
The law relates to payments under a divorce or separation agreement. This includes:
- Divorce decrees
- Separate maintenance decrees
- Written separation agreements
Tax Treatment of Alimony Before 2019
In general:
- The taxpayer who makes payments to a spouse or former spouse could deduct it on their tax return.
- The taxpayer who receives the payments was required to include it in their income.
Tax Treatment of Alimony After January 1, 2019
Beginning Jan. 1, 2019, alimony or separate maintenance payments are:
- Not deductible from the income of the payer spouse
- Not includable in the income of the receiving spouse
This applies if the payments are made under a divorce or separation agreement executed after Dec. 31, 2018.
Modifications to Pre-2019 Agreements
If an agreement was executed on or before Dec. 31, 2018 and then modified after that date, the new law also applies if the modification does both of the following:
- Changes the terms of the alimony or separate maintenance payments
- Specifically states that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse
Existing Agreements and Their Treatment
Agreements executed on or before Dec. 31, 2018 follow the previous rules.
If an agreement was modified after that date, it will still follow the previous law as long as the modifications don’t include the changes described above.
Frequently Asked Questions
What counts as alimony or separation payments under the tax law?
Alimony or separation payments include amounts paid under divorce decrees, separate maintenance decrees, or written separation agreements. These must be legally binding and meet specific IRS criteria.
Are alimony payments still tax deductible?
Not anymore, if the agreement was signed after December 31, 2018. For these agreements, alimony payments are not tax deductible by the payer and are not considered taxable income for the recipient.
Do older divorce agreements still follow the old tax rules?
Yes. Agreements executed on or before December 31, 2018 continue to follow the previous rules unless they are modified in a way that specifically adopts the new law.
What happens if an old alimony agreement is modified?
If a pre-2019 agreement is changed and the modification clearly states that the new tax law applies, then the payments are no longer deductible by the payer or taxable to the recipient.
Why did the tax treatment of alimony change?
The Tax Cuts and Jobs Act aimed to simplify the tax code and eliminate the deduction/inclusion rule for alimony to reduce tax disputes and streamline compliance starting with 2019 tax returns.