Posted by : Amy Henretty, CPA
The recent changes to the tax code from the Tax Cuts and Jobs Act uniquely affects each individual filing an income tax return. The repeal of the alimony deduction is one of the changes that will impact several people after December 31, 2018. Alimony, also known as spousal support, is a legal obligation on an individual to provide financial support to his or her spouse before or after marital separation or divorce. The prior tax code allowed alimony and separate maintenance payments to be deductible by the payor spouse and required inclusion in income by the recipient spouse.
Under the prior tax code, individuals could deduct an amount equal to the alimony payments they paid during the tax year as an “above-the-line” deduction in determining adjusted gross income. Conversely, alimony payments received by the recipient/beneficiary were required to be included in his or her gross income. Under the new law, alimony payments are no longer deductible by the payor spouse and will no longer be included in gross income by the recipient. For those who pay alimony, this change can be costly because the savings from the deduction of alimony payments can be substantial.
The previous tax rules will continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019. The effective date of this provision applies for any divorce or separation instrument executed after December 31, 2018, or for any divorce or separation instrument on or before December 31, 2018, and modified after December 31, 2018, if the modification expressly provides that the amendments made by the 2017 Tax Cuts and Jobs Act apply to the modification. Since the tax act wasn’t released until late in 2017, extra time has been given for the change in alimony to take place. The later effective date allows for more time to make changes to existing agreements. The new law most likely will result in higher costs for the payor since they will no longer receive a deduction; thus, modifying agreements will be essential.
The change to the alimony deduction/income rules can significantly impact your tax liability starting in 2019. If you have any questions on how this change may impact you, please contact us to further discuss your situation.