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New Rules for Alimony Under the TCJA (Tax Cuts and Jobs Act)

New Rules for Alimony Under the TCJA (Tax Cuts and Jobs Act)

Getting a divorce is no fun. But for almost 80 years, tax law has helped divorced couples. Alimony or separate child maintenance payments made by one ex-spouse to another under a divorce or separation decision have long been deductible for the paying spouse and taxable income for the receiving spouse. Indeed, this deduction was a particularly valuable "above the line" deduction from gross income, which could be obtained whether or not the paying spouse had indicated his personal deductions.

The alimony deduction was tax-spared because the ex-spouse who paid the alimony was generally in a higher tax category than the ex-spouse who received the alimony for children. For example, if an alimony payer fell into the 34% tax category, they would end up saving $3,400 in federal income tax for every $10,000 in deductible alimony payments. If the beneficiary were in the 10% range, they would only pay $1,000 tax on the $10,000. The total tax savings were $2,400. Divorce agreements took these tax savings into account and often allowed for higher alimony payments.

However, on January 1, 2019, a whole new tax regime for alimony came into existence. The Tax Cuts and Jobs Cuts Act (TCJA), the massive new tax law passed by Congress in 2017, permanently eliminates the alimony deduction for people who divorced in 2019 and beyond. Additionally, alimony recipients will no longer be required to pay or include taxes on child support payments. So, for example, an alimony payer who divorced in 2019 or later and pays $10,000 will not receive any deduction and will have to pay tax on the amount at their individual rate, up to 37%. The alimony recipient does not have to pay tax for the $10,000. As a payer, you end up paying more tax if the taxpayer is in a higher tax category than the beneficiary. The law is expected to generate $6.9 billion in income tax revenue over the next couple of years.

These changes apply to legal separations or divorces that ended on or after January 1, 2019. The above rules continue to apply to divorces that ended before January 1, 2019; alimony will continue to be deductible by the payer and taxed by the recipient. However, divorce or separation agreements prior to 2019 may be amended to apply the new rules to future payments. The amendment should specifically state that the TCJA treatment applies to alimony payments (non-deductible for the payer and non-taxable for the recipient). This change is purely voluntary. There may be situations where the voluntary application of the new TCJA rules would benefit both spouses, for example, when the beneficiary is now in a higher tax category than the paying spouse.

Due to the new rules, taxpayers will likely want to pay less in alimony than they would have if they deduct the payments.

If the recipient of alimony is 59½ years or older, there is a way to avoid this tax change: include retirement funds in a divorce agreement. For example, the paying spouse can transfer funds from their IRA to the receiving spouse's IRA. The transfer would be taxable to the recipient, who would have to pay tax at their individual rate but not taxable to the payer. This would be a one-time fee for the total amount transferred, not regular IRA payments. This transfer of retirement funds could partially or totally replace traditional alimony. Still, this scheme does not work well if the beneficiary is under the age of 59½, as a 10% fine has to be paid for the early withdrawal of the transfer, in addition to the normal income tax.

Please note that the rules above only apply to alimony - cash payments made to an ex-spouse under a divorce or separation agreement paid during the ex-spouse's lifetime. Child support or most other payments made after a divorce are neither deductible nor taxable.


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