Clarifying the Federal Tax Treatment of Alimony Payments
posted Apr 5, 2019 by Peri Ann Aptaker, Esq., CPA/PFS, CFP® in the Global Tax Blog
You may have heard a rumor that alimony payments are no longer deductible starting in 2019. That’s not entirely accurate. Here are the details.
It’s true, under the Tax Cuts and Jobs Act (TCJA), that certain taxpayers who pay alimony payments to an ex-spouse aren’t allowed to deduct the payments — and the recipient of such payments won’t have to claim the payments as income. However, these new rules for alimony don’t apply to everyone. They apply only to alimony payments made under divorce settlements made after December 31, 2018.
For existing pre-2019 agreements, it’s business as usual. That is, the payor can still deduct alimony payments, and the recipient must claim them as income. The deduction for alimony is above-the-line — so, the person who pays alimony under a pre-2019 agreement doesn’t have to itemize to benefit from the alimony deduction.
If you want to follow the TCJA rules for a pre-2019 divorce, you can modify your divorce agreement and specify that you want the new tax treatment to apply. Modifying an existing agreement may be desirable, if, for example, the ex-spouses’ tax situations have changed from the time the divorce was originally settled.
Definition of Alimony
The alimony deduction can be a big deal, especially if former spouses are in different tax brackets. Sometimes, however, payments between spouses made under a pre-2019 settlement are not deductible for federal income tax purposes. Under the tax code, the following criteria must be met for a payment to qualify as alimony:
- You can’t file a joint return with your ex-spouse or live in the same household as your ex-spouse.
- Payments must be made in cash or a cash-equivalent format.
- Payments must be made pursuant to a written divorce or separation instrument that doesn’t designate that payments aren’t alimony.
- Payments can’t be required to continue after the death of the recipient spouse. (If the divorce agreement doesn’t specify this, applicable state rules apply.)
Deductible payments can’t be treated as child support or a property settlement. If a divorce agreement provides for both alimony and child support, and the payor-spouse pays less than the total amount of maintenance, the payments apply to child support first. Any remainder is considered alimony.
Additionally, when claiming a deduction for alimony, the payor-spouse must include his or her ex-spouse’s Social Security number or individual taxpayer identification number. If not, the deduction may be disallowed, and a $50 penalty may be incurred.
Also, be aware that alimony isn’t subject to tax withholding. So, for pre-2019 alimony payments, the recipient may need to either: 1) make additional estimated tax payments, or 2) increase the amount of taxes withheld from paychecks, to avoid an under withholding penalty.
Despite congressional tax reform efforts, the tax code is still complicated. If you have questions about the new treatment of alimony payments — or any other provision of the TCJA — contact our tax professionals for guidance. Or visit our Tax Reform Center.