New tax law abolishes maintenance deductions – but not for everyone

In a divorce, a spouse or ex-spouse may be legally required to make payments to the other party. Since these payments are often significant payments, determining tax deductions has often been a significant problem for the payer. Prior to the new Tax Cuts and Jobs Act (TCJA), payments that met the tax definition of alimony were always deductible by the payer for federal income tax purposes. And recipients of alimony payments were always required to report the payments as taxable income.

This legacy treatment remains in effect for alimony payments made under divorce settlements prior to 2019. However, things will change dramatically for payments under agreements after 2018. Here is the story.

TCJA eliminates deductions for alimony required in post-2018 divorce settlements

Under the new law, the alimony deduction will no longer apply for payments required under divorce or separation deeds finalized after December 31, 2018. Recipients of affected maintenance payments no longer have to count these as part of their taxable income.

This TCJA treatment of alimony payments applies to payments required under divorce or separation instruments that (1) are executed after December 31, 2018, or (2) are modified after that date, if expressly provided for in the modification that the TCJA treatment of maintenance payments is expressly provided for. The payment rule now applies (non-deductible for the payer and non-taxable income for the recipient).

For people who are required to pay alimony, this change can be costly because the tax savings from being able to deduct alimony payments can be significant.

No change in tax treatment of payments required in divorce settlements before 2019 (Business as Usual)

There is no change in the federal income tax treatment of divorce-related payments required in divorce settlements entered into before 2019. However, for these payments to be considered deductible alimony, payers must still comply with the time-honored list of specific tax returns. legal requirements. If these requirements are met, alimony payments can be written off above the line on the payor's federal income tax return. This means that the payer does not have to provide any itemized information to benefit from the deduction. Payees must include alimony payments required under divorce agreements entered into before 2019 in their taxable income. This is a continuation of normal business operations.

When payments do not meet the tax law definition of support, they are generally treated as either child support payments or marital property division payments. Such payments constitute non-deductible personal expenses for the payer and tax-free money for the recipient.

Requirements for deductible maintenance

Whether or not payments required in divorce settlements prior to 2019 qualify as tax-deductible support will be determined solely by applying the applicable language in our popular Internal Revenue Code and related regulations. In general, it does not matter what is written in the divorce decree and what the divorcing couple may intend. In order for a particular payment requested in a pre-2019 divorce settlement to be considered deductible alimony, all of the following requirements must be met.

1. Request a written document

Payment must be made pursuant to a written divorce or separation document. This term includes divorce decrees, separate maintenance orders and separation documents.

2. Payment must be made to or on behalf of the spouse or ex-spouse

To be considered deductible maintenance, a payment must be made to or on behalf of a spouse or ex-spouse. Payments to third parties, such as attorneys and mortgage lenders, are permitted if they are made on behalf of a spouse or ex-spouse and as part of a divorce or separation agreement or at the written request of the spouse or ex-spouse.

3. The payment cannot be assumed to be non-maintenance

The divorce or separation document may not state that the payment in question is not a maintenance payment, nor may it effectively state that it is not a maintenance payment because it is not deductible by the payer or is not included the gross income of the payee can be included.

4. Ex-spouses are not allowed to live in the same household or apply together

After a divorce or legal separation, ex-spouses can no longer live in the same household or file a joint tax return for payments that are considered deductible support.

5. Cash or cash equivalent requirements

To be deductible as alimony, a payment must be made in cash or a cash equivalent.

6. Child support payments are not possible

To be considered deductible alimony, a payment cannot be classified as fixed alimony or child support under alimony tax rules. The rules governing what constitutes child support – particularly what constitutes deemed child support – are complicated for this purpose and present a nasty trap for unwary taxpayers. Consult a tax advisor if your proposed divorce agreement includes payments which concern both maintenance and payments for children.

7. Request the payee's social security number

In order for the payer to claim an alimony deduction for a payment, the payer's tax return must include the payee's Social Security number.

8. No obligation to continue payments after the death of the recipient

With the death of the recipient, the obligation to make payments (with the exception of payment of arrears) expires. If the divorce papers are unclear as to whether or not payments must continue, applicable state law will govern. If state law requires the payor to continue making payments (to the recipient's estate or beneficiaries) after the recipient's death, those payments cannot be deducted as alimony. In other words, for the payment to be considered deductible maintenance, the obligation to pay must end when the recipient dies. Failure to comply with this requirement for cessation of payments in the event of the recipient's death is the most common reason for the loss of alimony deductions.

The last word

If you are currently in divorce proceedings and will be paying your soon-to-be ex-spouse, the TCJA will not allow you to deduct any of these payments as alimony. On your soon-to-be ex-spouse's side, he or she doesn't have to treat any of the payments as taxable income. So from a tax perspective, this is a financial loss for you and a windfall for the counterparty. Consider this when negotiating your divorce agreement.

On the other hand, if you are paying your ex as part of a pre-2019 divorce settlement, nothing has changed. However, your payments must meet all of the above rules to be tax deductible as alimony.

(This story was updated on January 29, 2019.)

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