Historically, if an individual paid alimony or separate maintenance to their former spouse, they could deduct on their federal individual income tax return an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction. This kind of deduction allows a taxpayer to directly reduce his or her adjusted gross income instead of claiming the amount as an itemized deduction. On the flip side, alimony and separate maintenance payments are taxable income to the recipient spouse.
However, new rules are coming. Under the 2017 Tax Cuts and Jobs Act (the Act), there will be no deduction for alimony or separate maintenance for the payer, and the payments will not be taxable income to the recipient. Unlike most provisions of the Act, changes to alimony and separate maintenance do not take effect until 2019.
For divorces and legal separations that are executed, i.e., that come into legal existence due to a court order, after December 31, 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse won’t include them in income or pay federal income tax on them.
In addition, these new rules will not apply to existing divorces and separations. The current rules continue to apply to already-existing divorces and separations, as well as to divorces and separations that are executed before January 1, 2019.
Also, many state and local tax jurisdictions have adopted federal rules when determining their taxable income, so this new treatment may also impact state and local tax calculations.
On a tax planning note, there may be situations where applying these new rules voluntarily would be beneficial for the two taxpayers, for example when there is a change in the income levels of the alimony payer or the alimony recipient. In that case, some taxpayers may want the Tax Cuts and Jobs Act rules to apply to their existing divorce or separation. Under a special provision in the law, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified after December 31, 2018, the new rules apply to that modified decree if the modification expressly so provides.
If you wish to discuss the impact of these rules on your particular situation, please contact Yeo & Yeo.