The new tax law keeps accountants, attorneys and financial consultants busy translating the impact for their clients. If your marriage is coming to an end, you should have a thorough understanding of the law that takes effect in 2019 and what it means for the timing of your divorce in terms of alimony payments.
As it stands now, the party who pays spousal maintenance, or alimony, to the other party in a divorce is entitled to tax deductions on that amount. Conversely, the recipient must report those alimony payments as taxable income. The new Tax Cuts and Jobs Act takes the reverse approach: It does away with the tax deductions for payors and relieves payees of having to declare alimony payments as taxable income.
Keeping the deadline in mind
The new TCIA rules will apply to either a divorce or a legal separation that is executed after the deadline of December 31, 2018. It will also apply to a settlement that is modified after that deadline if the modification agreement states that the TCIA rules apply in terms of alimony payments.
Getting around the new law
If your divorce agreement is finalized prior to the deadline, the current laws will still apply and there will be no change to the federal income tax treatment of alimony payments. However, you must meet certain requirements:
- There must be a written divorce or legal separation agreement in force.
- It must be clear that payments are to be made for the purpose of spousal maintenance.
- You and your former spouse cannot reside in the same household or file taxes jointly.
- To qualify as deductible alimony, payments must be made either in cash or a cash equivalent.
- Payments cannot be deemed to be child support.
- The payer must include the Social Security number for the payee to claim an alimony deduction.
- If the alimony recipient dies, the payments to him or her will cease.
Timing is everything
The new TCIA law, which goes into effect on January 1, 2019, may take some explaining by professionals who understand the pros and cons, because you have some decisions to make. Basically, though, how you handle the question of alimony payments will depend on which side of the divorce you are on.