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New tax law eliminates alimony deductions

Under the new regulations, the individual who pays alimony to an ex-spouse will no longer be able to deduct those payments. And the recipient of the money will no longer pay taxes on that income.

New tax rules starting in 2019

For the past 70 years, alimony payments have been deductible by the payer and taxable as income to the recipient. Alimony was previously deducted on the front page of the form 1040 as an "above the line" deduction at line 31a, meaning that it was available as a deduction even for those taxpayers who didn't itemize. And it was taxable to the recipient.

That all changed under the TCJA. Now, alimony will not be deductible under new agreements signed on or after January 1, 2019. That also means that it will not be taxable to the recipient.

However, if you have an older agreement, the tax treatment stays as is unless you modify the agreement after January 1, 2019, by explicitly referencing the new law.

Whether payments required by pre-2019 divorce agreements qualify as tax-deductible alimony or not is determined strictly by applying the applicable language in our beloved Internal Revenue Code and related regulations. In general, what the divorce decree says and what the divorcing couple might intend does not matter. For a particular payment required by a pre-2019 divorce agreement to qualify as deductible alimony, all the following requirements must be met.

Requirements for deductible alimony

Written instrument requirement
The payment must be made pursuant to a written divorce or separation instrument. This term includes divorce decrees, separate maintenance decrees, and separation instruments.

Payment must be to or on behalf of spouse or ex-spouse
To qualify as deductible alimony, a payment must be to or on behalf of a spouse or ex-spouse. Payments to third parties, such as attorneys and mortgage lenders, are permitted if they are made on behalf of a spouse or ex-spouse and pursuant to a divorce or separation agreement or at the written request of the spouse or ex-spouse.

Payment cannot be stated to not be alimony
The divorce or separation instrument cannot state that the payment in question is not alimony or effectively stipulate that it is not alimony because it is not deductible by the payer or not includable in the payee’s gross income.

Ex-spouses cannot live in same household or file jointly
After divorce or legal separation has occurred, the ex-spouses cannot live in the same household or file a joint return for payments to qualify as deductible alimony.

Cash or cash equivalent requirement
To be deductible alimony, a payment must be made in cash or cash equivalent.

Cannot be child support
To be deductible alimony, a payment cannot be classified as fixed or deemed child support under the alimony tax rules. The rules regarding what constitutes child support--especially what constitutes deemed child support--for this purpose are complicated and represent a nasty trap for unwary taxpayers. Contact a tax professional if your proposed divorce agreement includes payments that you intend to be alimony as well as payments that you intend to be child support.

Payee’s Social Security number requirement
For the payer to claim an alimony deduction for a payment, the payer’s return must include the payee’s Social Security number.

No obligations for payments to continue after recipient’s death
The obligation to make payments (other than payments of delinquent amounts) must cease if the recipient party dies. If the divorce papers are unclear about whether or not payments must continue, applicable state law controls. If under state law, the payer must continue to make payments after the recipient’s death (to the recipient’s estate or beneficiaries), the payments cannot be deductible alimony. In other words, the payment obligation must cease if the recipient party dies in order for the payment to qualify as deductible alimony.

Failing to meet this requirement for payments to cease if the recipient dies is the most common reason for lost alimony deductions.

When payments fail to meet the tax-law definition of alimony, they are generally treated as either child support payments or payments to divide the marital property. Such payments represent nondeductible personal expenses for the payer and tax-free money for the recipient.

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