New Tax Litigation for Alimony Payments
The alimony deduction used to be a rare exception to the general rule that all income is taxable. A provision in the Tax Cuts and Jobs Act (TCJA) eliminates that exception.
Under previous law, a spouse who made alimony payments received a deduction for these amounts. The payee spouse had to include the alimony payments in his or her income.
The new TCJA alimony provision changes that, and it could have a significant impact on divorce negotiations.
The New Tax Rule for Alimony Payments
The paying spouse will not receive an alimony deduction any longer. They will have to claim the money they are paying as alimony as their own income.
The payee spouse will not have to claim anything. They will receive their alimony payments tax-free. Unfortunately, this tax treatment may not actually be as good as it sounds for taxpayers who receive alimony payments.
This tax law change is a net gain for the IRS and a net loss for taxpayers. The spouse who pays alimony should almost always be in a higher tax bracket than the spouse who receives alimony. That means the IRS receives more tax revenue under the new law.
Under the old law, a payer spouse in a high tax bracket could divert some of their income to their former spouse, who was presumably in a lower tax bracket.
More money for the IRS means less money for taxpayers. In the context of divorce negotiations, that means that the spouse paying alimony may try to argue that they should have to pay less under the new tax rules.
Separation Agreements Made Before 2019 Are Exempt
The big caveat is that the new rule only applies to divorce or separation agreements executed after December 31, 2018. It also applies to agreements that are made before this date but are then modified with language stating that the new tax provision applies.
So taxpayers with existing alimony agreements are safe. Perhaps taxpayers who are in the middle of the divorce process will rush to complete their separation agreements before the end of 2018 in order to get treatment under the old rules.
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