How do the tax code changes impact my alimony?

How do the changes to the tax code impact my alimony if I entered into an agreement before December 31, 2018?

How do the changes to the tax code impact my alimony if I entered into an agreement before December 31, 2018?

How the tax code impacts alimony depends entirely on the date of the agreement or award in the divorce. As a matter of federal law, the Tax Cuts and Jobs Act (TCJA) repealed the alimony deduction, changing how spousal support is taxed by the IRS. For alimony recipients and payors with a divorce or separation agreement executed, or signed, on or before December 31, 2018, there is no change from prior law. In common parlance, these agreements are ‘grandfathered in’ under the new law. (This includes alimony terms in prenuptial agreements and postnuptial agreements, too.) For all alimony agreements executed on or after January 1, 2019, the old tax deduction is gone.

Basic Federal Tax Rules Regarding Alimony

Whatever the type of alimony in Tennessee – in futuro (or periodic alimony), transitional, in solido, or rehabilitative – the following rules apply:

• Alimony arising on or before December 31, 2018: The recipient must include all alimony payments received in gross income for federal income tax purposes – this may increase taxable income. The alimony payor may deduct all alimony payments made in a given year from gross income (assuming the terms meet all IRS requirements) – this may decrease taxable income.
• Alimony arising on or after January 1, 2019: The alimony recipient does not include alimony received in his or her gross income. The payor cannot deduct alimony payments made over the course of the year.

The TCJA effectively put alimony in the same non-taxable event category as child support. As of January 1, 2019, neither alimony nor child support impacts either party’s taxable income.

Because exceptions may apply to your particular circumstances, always seek tax advice from a Certified Public Accountant or tax attorney. Also read Publication 504 Divorced or Separated Individuals at IRS.gov.

What happens if I modify an alimony order entered prior to December 31, 2018?

That depends. An alimony order executed on or before December 31, 2018, might need modification at some point because of a substantial and material change of circumstances. For alimony modifications occurring on or after January 1, 2019, the TCJA gives spouses and former spouses the option of changing how their modified alimony arrangement shall be taxed in the future. This presents an opportunity to re-structure payment terms in a way that provides the greatest tax benefit to both.

Say, for example, the original divorce or separation agreement is dated November 1, 2018, with modification sought in August the following year because of a spouse’s disability. With their attorneys’ assistance, the former spouses may agree to continue treating alimony payments as deductible from payor’s gross income and taxable to recipient’s. Alternatively, they may agree to make alimony a non-taxable event, accepting the post-TCJA rule by expressly stating that intention in the modification instrument.