By Song Han, CPA, Manager, ALL CPAs
There never may be a good time to go through a divorce. However, with the recent changes to alimony deductions under the Tax Cuts & Jobs Act (TCJA), you may have a huge financial incentive to finalize your divorce filings by year-end. Learn more about the changes to alimony deductions that go into effect January 1, 2019.
What’s the change?
In the past through 2018: alimony payments are deducted by payors and included as taxable income by recipients. Unless alimony agreements and orders are modified in the future to follow new law, these existing alimony’s tax consequences stay the same.
From January 1, 2019: for new divorces finalized after December 31, 2018, alimony payments are not deductible by payors and not includable as taxable income by recipients.
What is tax-deductible alimony?
To qualify for tax-deductible alimony, payments must meet eight requirements:
1) Payments are required by a decree of divorce, or a written separation instrument;
2) Payments must be made to or on behalf of a spouse or ex-spouse (payments to third parties are allowed as deductions under certain circumstances, such as payments to attorneys and mortgage lenders);
3) The divorce or separation instrument can’t state or effectively stipulate that the payment isn’t alimony;
4) The payor and recipient may not be members of the same household or file a joint tax return;
5) Payments must be in cash or a cash equivalent (checks and money orders);
6) Payments can’t be classified as or deemed child support;
7) The payor’s tax return must include the payee’s SSN; and
8) The obligation to make payments (other than delinquent) must cease when the recipient dies (if the divorce document is not clear about this, state law controls the outcome.)
What are your options?
It depends on which side you are on. If you will be the payor, you have a huge incentive to get your divorce agreement wrapped up and signed by 12/31/2018. On the other hand, if you will receive payments, you have the same incentive to put off finalizing your agreement until next year, because payments will then be tax-free for you.
If you have any questions on alimony deductions or changes under the TCJA in general, please reach out to me at Shan@all-cpas.com or 617-738-5200.
