The recently passed Tax Cuts and Jobs Act, as it is known, has a provision that is not as publicized as some others: the repeal of the alimony deduction.
Currently, payments made from a spouse to a former spouse under a written separation agreement are deductible by the payor and taxable to the recipient, as long as certain conditions are met. This has been effective in providing families with some additional cash.
The expenses for divorcing families generally increase, because typically there are two homes, a loss of subsidized health insurance, and duplication of other expenses which were not necessary in the past. The additional cash provided some temporary relief for someone to get back into the workforce, or to find a job after a period of time at home raising children.
The deduction reported by the payor is typically realizing a tax benefit that is greater than what is paid by the recipient. The next tax savings provides additional money for the families to support two households.
Effective for divorce or separation instruments executed after December 31, 2018, alimony will be nondeductible by the payor and non-taxable to the recipient. For those who had divorced prior to December 31, 2018, alimony that is then later modified will remain deductible and taxable unless the modification expressly provides otherwise.
For example, if you had a final divorce agreement executed prior to 2019, and you now are in 2020 revisiting spousal support for the various reasons outlined in your agreement, you are not necessarily going to lose the deductibility of that payment just because your agreement predates the new law.
So what can be done?
If you have been contemplating a divorce, you may want to consider having that done in 2018 if preserving the deductibility of this payment is going to be helpful to your family in terms of the cash and the tax savings realized.
Contact me with questions or comments today.
Susan A. Moussi, CPA, CFP®, CDFA SMD Tax & Divorce Financial Planning Consultants, Inc. Phone: 614.429.4172 firstname.lastname@example.org