Alimony Tax Treatment | Spire Group, PC
We’re not here to tell you that alimony payments are a thing of the past; they’re very much alive. However, the tax treatment of alimony for the payer and the recipient is changing as a result of the Tax Cuts and Jobs Act of 2017. Owing to tax reform, alimony payments will no longer be deductible under divorce agreements (or certain modifications to pre-existing agreements) entered into after Dec. 31, 2018. Additionally, alimony payments will no longer be taxable to recipients.
It is important to note that the elimination of the alimony deduction does not impact divorce agreements entered into prior to January 1, 2019. For those agreements, future alimony payments will still be deductible for payers (and taxable for recipients) in 2019 and beyond. Only new divorce agreements entered into after December 31, 2018 will preclude the deductibility of alimony payments.
What does this change mean for divorcing spouses and their counsel? In short, in most cases it means there will be fewer after-tax dollars remaining for the ex-spouses after the payment of alimony, as shown in the example below. As a result, many experts believe this will lead to lower alimony payments compared to similar circumstances under prior tax law because there will be less after-tax cash to go around.
This change in the tax law will make alimony payments similar to child support in that they will both be non-deductible for the payer and non-taxable the recipient. The clock is now ticking for divorcing couples and their counsel to reach agreements before the end of 2018 in order to retain the tax benefits associated with alimony deductions.
Do you have questions about tax reform’s impact on alimony payments, or other tax matters? Please contact us at 732-381-8887.