marital woes

How to Secure Deductions on Alimony Payments Before Tax Law Ends Write-offs

Feb 14th 2018
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The tax cost of getting a divorce is going up for some individual taxpayers.

Under the new tax law, the Tax Cuts and Jobs Act (TCJA), deductions for alimony payments will no longer be deductible on a personal tax return. On the other hand, alimony recipients won’t have to report the payments as taxable income either. Both provisions are coming off the books.

However, unlike most of the other new tax provisions for individuals, the changes aren’t immediately effective in 2018. Notably, you could get divorced and separated this year and still qualify for deductions in the future. In any event, alimony paid out under a prior agreement remains deductible on your 2017 return.

To recap the basic tax rules in effect before the new law, taxpayers who pay alimony to a divorced or separated spouse could deduct those amounts, while recipient spouses owe tax on the income. However, not all payments qualify as deductible alimony. The terms of the divorce decree must meet certain requirements spelled out in the tax code.

Specifically, payments qualify as deductible alimony only if ALL of the following apply:

  • The spouses don't file a joint return with each other;
  • The payment is in cash (or an equivalent like 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 alimony;
  • The spouses aren't members of the same household when the payment is made; and
  • There's no liability to make the payment (in cash or property) after the death of the recipient spouse.

Conversely if a payment is made for, say, child support or as a property settlement, it is NOT treated as alimony for tax return purposes. In other words, these payments are neither deductible by the payor nor taxable to the recipient. That’s true under both the prior and revised law.

The TCJA repeals the deduction for alimony payments by payors, and the corresponding taxation of payments by recipient spouses, but these changes won’t affect 2017 tax returns being filed in 2018. Alimony payments made under prior to the law remain deductible and taxable. The new rules take effect for agreements executed after December 31, 2018. (Agreements modified before Jan. 1, 2019 may also be grandfathered under the old rules.)

Key point: As opposed to many of the new law changes that sunset after 2025, and thus could be revived, the repeal of the alimony deduction is permanent. There’s no going back. 

These new rules can be critical for clients who are getting divorced or separated in 2018. The terms of a divorce decree should reflect the intentions of the parties pertaining to the tax consequences. But taxpayers who were previously divorced or separated can continue to go about their business.

This article is part of a series titled Vintage 2017 Tax Deductions, which focuses on the key deductions your clients may be able to claim under the new tax law.

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