You’ve probably heard all about how spousal support is tax deductible to the paying spouse and counted as taxable income for the recipient spouse, but as of January 1, 2019, that’s all going to change. On January 1st, alimony will no longer be tax deductible for the paying spouse and the recipient spouse will no longer be taxed on it.
Under the existing federal tax law, “Amounts paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce degree, a separate maintenance decree, or a written separation agreement) may be alimony for federal tax purposes. Alimony is deductible by the payer spouse, and the recipient spouse must include it in income,” according to the Internal Revenue Service.
How Are Things Going to Change?
The tax overhaul, resulting from the Tax Cuts and Jobs Act (TCJA), will scrap a 75-year-old tax deduction for spousal support payments. The new law, which takes effect January 1, 2019, will not affect anyone who signs a divorce agreement before December 31, 2018.
It is our opinion that the tax change will make divorce negotiations more difficult, especially for wealthy individuals who benefit the most from the pre-2019 tax deduction. If you are contemplating divorce and you enter into an agreement on or after January 1, 2019, the spouse who pays spousal support will not be able to deduct the payments on their taxes, and the spouse who receives it won’t be paying any income taxes on it.
Up until now, the tax deduction has been an excellent bargaining tool, but in January, divorcing and separating spouses are going to lose it. One of the biggest concerns is that wealthy spouses are going to negotiate smaller spousal support payments because they will be losing the tax advantage, and this will most certainly occur.
What About Modifications?
Suppose you entered into a separation or divorce agreement before December 31, 2018 and you or your spouse decided to ask the court for a modification of the spousal support payments. Would the paying spouse lose the tax deduction? Would the recipient spouse no longer have to pay income tax on the spousal support received?
If you sign a separation or divorce agreement before December 31, 2018 and the spousal support order is modified in 2019 or later, the pre-2019 tax rules would still apply, unless the agreement used specific language stating otherwise.
So, if you want to take advantage of the current tax laws, you would want to ensure that you were locked into an agreement before the end of the year. Remember, as long as you don’t specify that the 2019 laws will apply if you modify your agreement after January 1st, it will be business as usual.
Spousal Support Requirements
For payments to a spouse to be tax deductible according to the pre-2019 standards, they must qualify as spousal support or alimony. According to the IRS, a payment made to a spouse only qualifies as spousal support if the following is true:
- The spouses do not file a joint tax return,
- The payment consists of cash, a check or money order,
- The payment is made under a legal separation or divorce agreement,
- The legal separation or divorce agreement does not state that the payment is not spousal support,
- The spouses do not live in the same home when the payments are made,
- The paying spouse is not obligated to make the payment after the receiving spouse dies, and
- The money paid is not treated as a part of the property settlement, nor is it treated like child support.
The following payments are not spousal support:
- Child support,
- Property settlements that are not made in cash,
- Payments made to maintain the paying party’s property,
- The receiving spouse’s use of the paying spouse’s property, and
- Payments that are made voluntarily; for example, payments made by a husband to his wife that are not included in the separation or divorce agreement.
“Can I pay more child support to offset the changes or is that not deductible?” Child support is not tax deductible, nor is it counted as taxable income by the receiving party. Since child support is never deductible, there is no way for a spouse to up their child support payments in hope of a tax advantage that doesn’t exist.
Under the 2018 tax laws, this is what the IRS has to say: “If you paid amounts that are considered alimony, you may deduct from income the amount of alimony you paid whether or not you itemize your deductions. Alimony payments are only deductible on Form 1040.pdf, U.S. Individual Income Tax Return.
You must enter the social security number (SSN) or individual taxpayer identification number (ITIN) of the spouse or former spouse receiving the payments or your deduction may be disallowed and you may have to pay a $50 penalty.”
The IRS continues: “If you received amounts that are considered alimony, you must include the amount of alimony you received as income. You may only report alimony received on Form 1040, or on Schedule NEC, Form 1040NR.pdf, U.S. Nonresident Alien Income Tax Return. You must provide your SSN or ITIN to the spouse or former spouse making the payments, otherwise you may have to pay a $50 penalty.”
At Claery & Hammond, LLP, we are not in the practice of rushing people through their divorce proceedings, but if you would benefit by the 2018 tax laws, we recommend contacting our firm soon rather than later. You may not want to delay your divorce!