The Tax Cuts and Jobs Act, passed in December 2017, significantly changes the way alimony or spousal support is treated under federal tax law. Under the current tax structure, the payor spouse (the spouse paying alimony) can deduct the amount paid to the former spouse each month on his or her tax return. The payee spouse (the spouse receiving the alimony payment) must report the alimony payment as taxable income each year.
How does the Tax Cuts and Jobs Act Treat Alimony?
Under the Tax Cuts and Jobs Act, the new tax law switches the roles of the payor and payee. Under the new law’s alimony provision, the payor spouse’s alimony sent to the former spouse is now taxable income. The payee spouse, on the other hand, will be able to deduct the alimony payment. For high-earning spouses, this can significantly increase their tax burden.
Why does the Tax Cuts and Jobs Act Change the Way Alimony is Treated?
In short, to raise more tax revenue. Because the spouse with the ability to pay alimony typically makes more money than the former spouse, making the alimony payments taxable income will inevitably result in a higher effective tax rate for alimony payments. For example, Alex makes $100,000 per year and sends $24,000 a year in alimony to his former spouse Casey, who only makes $20,000 per year. Under the current tax structure, the tax for the alimony is paid by Casey – who would roughly pay a 15% tax on an alimony payment. Under the Tax Cuts and Jobs Act, Alex would now pay a 28% tax rate on the alimony payments. That means the government will receive $3,720 more in tax revenue by shifting the tax liability to the wealthier payor spouse.
Who is Affected by the New Alimony Law?
For individuals who have completed their divorce agreements before January 1, 2019, nothing will change unless the alimony agreement is modified after that point. The new tax law’s treatment of alimony will apply in two circumstances:
- Any separation or divorce agreement executed after December 31, 2018
- Any modification of a pre-2019 divorce agreement which explicitly states the Tax Cuts and Jobs Act treatment of alimony payments will apply to the new agreement.
What is Not Affected by the New Alimony Law?
Almost all other provisions remain the same. Alimony must be included in a divorce decree, separation instrument, etc. – otherwise it is deemed taxable income to both parties. The payment must be between the spouse and ex-spouse. Also similar, the spouses cannot be living together, the payment must be made in cash or a cash equivalent, and the obligation for alimony ends if the payee (or recipient) dies.
Because these laws do not apply to divorces or settlement agreements issued on or after January 1, 2019, it is important to speak with a knowledgeable divorce attorney about any potential tax consequences concerning any potential separation or divorce.