Thinking About Divorce? How a New Law Eliminates Alimony Deduction in 2019

No one says to their friend—even if they think it—would you please hurry up and get that divorce you’re thinking about?! Your business advisors don’t say that either, but this year they might have a hard time holding back from asking you if you’re heading down that path.

The reason is the new Tax Cuts and Jobs Act (TCJA). It repealed a 75-year-old law and changed what it means for alimony payments for divorce agreements beginning on January 1, 2019. Agreements finalized and signed before 2019 will remain the same.

The Old Way

Thinking About Divorce? How a New Law Eliminates Alimony DeductionAgreements signed prior to 2019 are subject to law that says the person paying alimony will still be able to take payments as an “above the line deduction” on their tax return. It also means the person receiving the alimony will still have to claim it as income. “Above the line” means it’s a deduction that can be claimed without itemizing. For the payments to remain deductible, there are conditions that must be met.

Those conditions include: the spouses don’t file a joint tax return; payments are made in cash, check or money order; the payment is made in accordance with a separation or divorce agreement; the agreement doesn’t say the payment isn’t alimony; spouses are not living in the same house when the payment is made; there is no liability to make the payment after a former spouse has died; and the payment isn’t for child support or property settlement.

The New Way

With the new TCJA in place as of Jan. 1, 2019, it turns things upside down, affecting all agreements finalized and signed on or after that date. At that time, alimony payments are no longer deductible on tax returns, and alimony received doesn’t have to be claimed as income.

Existing agreements are not subject to this, but “can be amended to fall under the provisions of the new law should the parties involved desire it,” according to BNY Mellon. It is unclear if agreements modified Jan. 1, 2019, or later, will lose their grandfathered status and become subject to TCJA or not, and it is suggested a private letter ruling from the IRS to clarify the issue may become necessary.

What Happens In The End

In the end, what the TCJA did was give both sides in a divorce a solid reason to fight. That’s because the payer of alimony will still want it as a deduction to save on paying taxes for money they earn but don’t get to keep, and to get the agreement completed and signed in 2018.

The receiver will most likely work to put it off until 2019 so they won’t have to claim it as income and it will be tax-free. At the end of this process, it will leave the judge to play Sampson and decide where to fairly lay his “sword” amidst the stalling tactics and possible concessions.

If you have an existing agreement, or are preparing one, and would like expert advice to help navigate your way through this new minefield, contact Klein Hall CPAs today for an appointment.