As of January 1, 2019, the new TCJA tax rules have impacted any U.S. spouse who has paid or received child support under a divorce or separation agreement entered into after December 31, 2018.
According to the rules of the TCJA, alimony will not be deductible or taxable under the terms of contracts signed as of January 1, 2019. As for contracts signed before January 1, 2019, they remain "as is." Child support paid under these "old" arrangements is taxable under the above rules (for example, child support is deductible by the paying spouse and taxable by the receiving spouse) unless the parties agreed after January 1, 2019, making specific references to the new law and stating that the new law modifies the agreement.
This article will cover the details on alimony taxation, including explaining the guarantee imposed on a U.S. spouse who pays child support to a non-resident alien under a precedent, statutory contract.
IRS Publication 5307:
The Internal Revenue Service provided taxpayers with information about the new child support rules on page 10 of IRS 5307. The information on that publication might be a bit fuzzy and confusing to taxpayers. I can only imagine a taxpayer whose divorce agreement was changed after December 31, 2018, without including child support payments in income on the 2020 tax return, according to the IRS publication, which states the following:
"Repeal of Deduction for Alimony Payments"
Alimony and separate maintenance are no longer deductible for any divorce or separation agreement entered into after December 31, 2018, or for any separation agreement or divorce before December 31, 2018, and amended after that date. Additionally, separate child support and allowance payments are no longer included in your income as of that date, so you will not have to record these reimbursements on your return if the payments are based on a divorce or solution executed or modified separation after December 31. 2018.
Let's Explain This:
Alimony or indemnity benefits paid to a spouse or former spouse under a divorce or separation agreement, such as a separate support order, divorce decree, or written separation agreement, maybe for federal tax purposes alimony or separation is deductible if the taxpayer is the paying spouse and the recipient spouses must include the alimony or separation in their income.
As of January 1, 2019, alimony or separate support is not deductible from the income of the paying spouse, nor can it be included in the recipient spouse's income if made under a divorce agreement or separation after December 31, 2018.
This also applies to a separation agreement or divorce entered into before December 31, 2018, and amended after December 31, 2018, provided that the amendment:
• Modify the alimony conditions or separate maintenance allowances
• Declares that separate payments for separate maintenance allowances or alimony are not deductible by the paying spouse and cannot be included in the receiving spouse's income.
In contrast, separate maintenance allowances or alimony are generally deductible from the paying spouse's income. They may be included in the income of the receiving spouse if they are made under a divorce or separation agreement entered into or no later than December 31, 2018, even if the contract has been modified after December 31, 2018, provided that the amendment is not as described in the previous paragraph.
The Summary Is:
If, after December 31, 2018, you have changed (or will modify) a divorce or separation agreement signed on December 31, 2018, or before December 31, 2018, the child allowance paid is still deductible from the paying spouse. The beneficiary spouse is always included unless the change does two things:
Firstly, the modification must change the terms of payment of separate maintenance allowances or alimony; and,
Secondly, the modification must provide that separate maintenance allowances or alimony are not deductible from the paying spouse or are not included in the receiving spouse's income. In other words, the wording must expressly state that the waiver of the deduction for family allowances applies to the modification of the instrument.
Do Not Forget Withholding Duties:
If child support payments to a non-resident alien are taxable per the rules described above, they will be subject to gross withholding tax if the alimony is from "U.S. sources." Remember, family allowances should be taxed according to the rules above before worrying about U.S. taxes and withholding taxes.
Understanding withholding obligations is important because if the U.S. spouse paying child support has to meet and neglect withholding obligations, the paying spouse may be personally liable for the tax. Payments of income from U.S. sources (such as alimony payments considered to be U.S. sources) are also subject to reporting obligations. The spouse who pays the family allowance must obtain a W8-BEN form from the Non-resident alien's beneficiary. Part I of the form contains an attestation that the beneficiary is a non-resident alien. Part II covers the right to claim treaty benefits, reducing or eliminating withholding if such benefits exist. The paying spouse keeps the W8-BEN form; it is not sent to the IRS. If the family allowance is from U.S. sources, the paying spouse will require a 30% deduction (or lower rate).
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