Alimony Deduction Eliminated
One of the little discussed provisions of the Tax Cuts and Jobs Act of 2017 is one that impacts alimony payments. Prior to the new law, alimony payments were deductible off the payer’s income, just like mortgage interest or real estate taxes; and the payments were counted as income by the recipient spouse. This was beneficial in some cases when reaching an alimony agreement during divorce negotiations. The reason, the payer is usually in a higher tax bracket and as much as they groused and complained about paying alimony at least it was deductible off their income, so maybe a $30,000/year payment only actually cost them $24,000 after the deduction. And the recipient was probably in a low bracket and paid a very low rate on the income. If the ex-spouses were trying to maintain a standard of living for the children, keep the house until the kids graduated from high school, or had other common goals this tax savings could help achieve these goals.
However, the new law makes alimony payments nondeductible for the payer and non-taxable for the recipient. This applies to divorce agreements executed after December 31st, 2018. It may also apply to agreements in existence prior to January 1, 2019 that are modified and expressly provide that the new amendment applies.
Many of the tax provisions of the new law expire after 2025, interestingly this one doesn’t. The take-away from this change is if you are in the process of getting divorced in 2018 it might be best to negotiate a settlement and get it signed and sealed before the end of December.