The new tax law has a tremendous impact on family law because of the change in status of alimony tax payments. Alimony is support paid by one spouse to another as a result of a divorce or separation. Under current federal law and through December 31, 2018, alimony may be a taxable event and is a tax deduction by the paying spouse and includable as taxable income by the recipient spouse.
The new law, Tax Cuts and Job Acts (TCJA), eliminates the deduction for the paying spouse for post-2018 alimony agreements. This means that the paying spouse may not claim the payments as a tax deduction and the recipient spouse may not claim the alimony payments as taxable income for alimony agreements entered into after December 31, 2018. TCJA will apply to alimony agreements executed after December 31, 2018 and or modified after that date if the agreement or order specifically states that TCJA applies.
The old law treatment applies to any divorce agreements made prior to 2019. In order to determine if a payment qualifies per IRS guidelines for agreements or orders made prior to 2019, the following criteria must be considered:
- the payment must be from one spouse to a spouse or former spouse
- the payment must be pursuant to a written agreement or court order between the spouses
- the payment must be made with cash or cash equivalents i.e. check, direct deposit, money order, etc.
- the payor and recipient must live in different households
- the payor and recipient must file separate tax returns
If the payment meets these requirements, then for the spouse receiving alimony, it is taxable and considered income and the spouse paying the support can deduct the amount from gross income. Under the current law, the parties may stipulate and agree that alimony that meets the criteria is a nontaxable event but it must be explicit in the written agreement or court order.
The tax treatment of alimony is always an important consideration in analyzing a divorce and it just became a more complicated for parties considering divorce in 2018.
If you’d like to speak with a Held Law Firm attorney, call (865) 685-4780 to schedule a case assessment.
