Here’s a common question we’re hearing from tax practitioners: Some of my clients want to know if they can still deduct alimony payments if they get divorced. How does this work under the new tax law?
The short answer is that, yes, alimony payments continue to be tax-deductible, but the rules are changing. Under a provision in the new tax law, the Tax Cuts and Jobs Act (TCJA), this deduction is repealed for agreements executed after 2018. So taxpayers still have time to work out the details, but not for much longer.
First, here’s some background information. Currently, alimony is generally deductible by the payor. This deduction is claimed “above the line” so it reduces adjusted gross income (AGI) for other tax purposes. Thus, it can be a valuable write-off for many clients.
On the flip side, alimony payments represent taxable income to the recipient. So your clients who are entitled to receive alimony get the short end of the tax stick.
In contrast, other payments made pursuant to a divorce or separation generally are not deductible by the payor or taxable to the recipient. This includes child support and payments of property intended to even out a couple’s finances.
The language in the divorce or separation agreement usually controls whether payments should be treated as alimony or not. However, to be deductible, the IRS has established the following requirements:
- The spouses don’t file a joint return with each other.
- The payment is in cash (including checks or money orders).
- The payment is to or for a spouse or a former spouse made under a divorce or separation instrument.
- The divorce or separation instrument doesn’t designate the payment as not being alimony.
- The spouses aren’t members of the same household when the payment is made. (This requirement applies only if the spouses are legally separated under a decree of divorce or of separate maintenance.)
- There’s no liability to make the payment (in cash or property) after the death of the recipient spouse.
- The payment isn’t treated as child support or a property settlement.
Now the TCJA creates another wrinkle. For agreements entered into after 2017, the deduction is no longer available to payors, nor is alimony taxable to recipients. However, payments under pre-2019 agreements remain deductible by payors and taxable to those who receive it. And, if an older agreement is modified before 2019, the tax consequences remain the same.
The message for clients who are getting divorced or separated in 2018 is clear. Incorporate this into your negotiations to arrive at the intended results for any given situation.
Finally, there’s one more noteworthy point about the new rules for alimony payments. Unlike most other TCJA tax changes for individuals that sunset after 2025, this provision is permanent. Once the ink on the agreement’s signatures dries, there’s no going back.