Divorce is one subject that affects your tax accounting. However, new laws have come into effect and things are changing. In some situations, an ex-spouse is legally obligated to make payments to the other person. This is often referred to as alimony. These payments tend to be substantial and bring with them tax benefits.
The Tax Cuts and Job Act (TCJA) has changed the deductions the payer can claim on their federal income tax. All divorces that fall under the pre-2019 agreements will not be affected. However, any payments made under post-2018 agreements will change.
What Does TCJA Do?
TCJA removes deductions for alimony payments which were required by divorce agreements post-2018. Basically, any divorce or separation that takes place after December 31, 2018, will no longer be able to claim alimony payments as a deduction. Nor will the recipient of the alimony payments have to include them as taxable income on their tax returns.
This change in law can really hit hard for those making alimony payments, as there will no longer be tax savings. For those who have an agreement pre-2019, tax deductions for alimony payments will remain. However, if modifications are made to the alimony payment arrangements then tax deductions could be affected.
Payments must qualify as deductible alimony and must follow the time-honored list of specific tax-law requirements. As long as these requirements are met, the payer will be able to take the alimony payment as a deduction. Therefore, the payer would not have to itemize in order to reap the deductions. These payments must be executed by the courts before 2019. If the payments do not fit the definition of alimony, then they would be treated as child support or marital property dividends.
Alimony Deduction Requirements
Individuals must meet the following requirements to use alimony as a tax deduction.
- Payments must be defined in a written divorce or separation agreement.
- The payment must be made to the spouse or ex-spouse. Payments to third parties are allowed if made on behalf of the recipient and defined in the divorce or separation agreement.
- Payment must be stated as alimony to qualify.
- The recipient cannot share a home with the payee or file a joint income tax.
- Payments must be made in cash or a cash equivalent.
- Payments cannot be defined as child support.
- Payer’s return must include their social security number.
- If the divorce agreement states that payments are to be made to estate or beneficiaries after their death, they cannot be used as alimony deductions any longer.
There are a lot of things to consider when it comes to alimony payments and tax accounting. Be sure you understand the laws before making any type of claims to deductions.
Parker Business Consulting & Accounting, P.C. is a unique firm with more than a combined 75 years of experience in private industry, coupled with a strong background in public accounting. This combination enables us to provide valuable assistance based on direct experience with many of the same issues faced by our clients.