Alimony is set to undergo a fundamental change beginning January 1, 2019. Currently, alimony payments are deductible from the payor’s federal income taxes and are treated as income to the recipient. However, the recently enacted Tax Cuts and Jobs Act (the “TCJA”) eliminates the income tax deduction and will no longer treat alimony payments as income. The new act only applies to divorce judgments and agreements entered after December 31, 2018.
What does this mean? If you are currently going through or anticipating a divorce, and you foresee having to pay alimony to your former spouse, you have a huge incentive to conclude the divorce prior to the end of 2018 in order to deduct your alimony payments in the future. If you are expecting to receive alimony from your former spouse, you will want to wait and conclude the divorce after the new year, or you will have to report the payments as taxable income.
What if your previously ordered alimony payments are modified after December 31, 2018? In that case, the modification order must specifically state that the TCJA treatment of alimony payments will apply to the modified payments. Otherwise, alimony payments will continue to be deductible for payers and treated as income for recipients.