The Tax Cuts and Jobs Act (the Act) ushered in significant tax reforms for both individuals and businesses with its passage last December. Most of these changes take effect in 2018, and their impact will be seen and felt immediately. One of the provisions of the Act which becomes effective in January of 2019 is a change in the tax treatment of alimony.
Under our current law, an individual who pays alimony or separate maintenance may deduct the amount paid during the calendar year as an “above-the-line” adjustment. It reduces the paying individual’s adjusted gross income regardless of whether the taxpayer itemizes deductions. The recipient of these alimony or separate maintenance payments must include them in their income.
Under the Act, there is no longer a deduction for alimony for the payer. Furthermore, the recipient does not have to include alimony in their income. For divorces and legal separations that are executed after 2018, the alimony-paying spouse will not be able to deduct the payments, and the alimony-receiving spouse will not have to include them in gross income. Alimony will be a non-taxable benefit to the recipient.
It is important to note that the new rules will not apply to existing divorces and separations, or those executed in 2018. There is a special provision which will allow pre-2019 divorce or separation decrees to be legally modified so that the new Act rules will apply. There may be situations where applying the new rules voluntarily is mutually beneficial, particularly when income levels of the payer or the recipient change.
Understanding this tax law change is important to the legal community, and there will be planning opportunities in the coming year relating to marital dissolution. If you have any questions about the alimony changes or other parts of the Act, ask a tax advisor.
Stephanie B. Smith, CPA, CFF
Stephanie B. Smith is a member of GranthamPoole PLLC and a recognized leader in the fields of business valuation and litigation support. She has also written, taught, and spoken on many topics in the area over the years and has served as a technical advisor and testifying expert in numerous cases. Please contact Stephanie at ssmith@granthampoole.com or 601-499-2400. CPA License # 3657
***The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.