Prior to the Tax Cuts and Jobs Act (“TCJA”) that went into effect in 2018, alimony and spousal support was generally deductible by the ex-spouse paying it and included in the taxable income of the ex-spouse receiving it. Child support, on the other hand, has never been deductible by the payer or taxed as income to the recipient.
Under the TCJA, for divorce agreements executed (or, in some cases, modified) after December 31, 2018, alimony payments are not deductible and will be excluded from the recipient’s taxable income. In effect, alimony will be treated the same way as child support. For alimony agreements in place before January 1, 2019, the treatment of alimony follows the “old rules” as they were grand-fathered into law. Because of the substantial change in tax treatment for alimony you can imagine how extremely busy the divorce attorneys and family courts were in December!
A word of caution for those thinking about modifying a pre-2019 divorce agreement. You could inadvertently taint your “old” agreement such that the revised spousal support agreement now falls under the new 2019 nondeductible/nonreportable rules. In most cases, this will result in higher taxes when looking at the combined financial pictures of both spouses. Unless legislation is altered, this change is permanent. If you have further questions regarding this topic or any changes related to TCJA, please contact your Wegner tax professional.