Effective January 1, 2019, major changes to the tax treatment of alimony have upended more than 70 years of established federal tax rules.
Historical Tax Treatment of Alimony
Previously, alimony was a highly lucrative above-the-line federal tax deduction, which meant that it reduced taxable income prior to calculating adjusted gross income. This deduction was available whether taxpayers itemized deductions on their tax returns or not. Additionally, the ex-spouse receiving the alimony had to claim the payments as income on their tax returns.
How Alimony Payments Now Impact Your Taxes
As of January 1, 2019, however, alimony payments are no longer a deduction for the payor. This can lead to ex-spouses who are paying alimony being liable for thousands of dollars more in taxes than they would have been had they divorced prior to December 31, 2018. Furthermore, the ex-spouse receiving alimony payments no longer must report the payments as income. These changes are part of the Tax Cuts and Jobs Act passed by Congress in December 2017.
This change, however, does not impact child support payments, which are neither tax-deductible for the payor nor count as income for the recipient. Likewise, the change does not affect individuals who already are paying or receiving alimony pursuant to a court order dated prior to December 31, 2018.
Projected Outcome of Tax Changes on Divorce Proceedings
According to some professionals, the concern with these changes in tax law is that alimony payments in general will shrink, which will disproportionately affect women. On the whole, women tend to be financially worse off than men following a divorce and they make up the bulk of alimony recipients.
Since alimony payors no longer will be able to benefit from a large tax deduction for paying alimony, the concern is that they will be more reluctant to pay alimony at the levels that they would have in the past, or even to pay it at all. Although women may benefit from receiving tax-free alimony income, it is likely that they nonetheless will receive a decreased amount of alimony overall.