Batson Nolan wants to keep you up-to-date on the changing laws affecting your taxes.

In divorce situations, one ex-spouse may become legally obligated to make payments to the other party. This obligation is called alimony and is a separate consideration from child support. Alimony payments are generally made to an ex-spouse that earns less money. Because these payments are often substantial, locking in tax deductions for the payer has often been an important issue. The Tax Cuts and Jobs Act of 2017 signed into law in December 2017 provided a major overhaul to the previous tax legislation addressing alimony.

Elimination of Alimony Tax Deduction

  • Before the new tax bill, payments paid to a former spouse were treated as a tax deduction for the payer and income to the recipient.
  • The payer received an above-the-line deduction, which decreased taxable income dollar-for-dollar by the amount paid.
  • The recipient had to include the payments as income, thereby increasing their taxable income by the amount received. As a result, income was often shifted for a recipient in a lower tax bracket, resulting in lower combined taxes paid.
  • This old-law treatment continues for payments made under pre-2019 divorce agreements.

The new rules for the treatment of alimony payments are effective for divorce or separation agreements entered into after Dec. 31, 2018. Under the new tax bill, the tax deduction for payments is eliminated, and recipients no longer need to treat alimony received as taxable income.

This TCJA treatment of alimony payments will apply to payments that are required under divorce or separation instruments that are:

(1) executed after Dec. 31, 2018

(2) modified after that date if the modification specifically states that the TCJA treatment of alimony payments (not deductible by the payer and not taxable income for the recipient) now applies.

Future divorces are not the only thing that will be affected by the new tax bill. Prenuptial and postnuptial agreements typically contain clauses outlining what alimony would look like should the couple get divorced. Until this point, those clauses have been drafted assuming the alimony tax deduction will be in place.

The experienced attorney at Batson Nolan routinely deal with the complexities of family law and divorce , and are ready and available to help you navigate your way through. Contact us today to find out more about changing tax laws and if they can affect you.