If your divorce was final last year or is still in process, your attorney likely has told you about the tax changes regarding alimony that were implemented with the 2017 Tax Cuts and Jobs Act (TCJA) passed by Congress and signed by President Trump.
There was some confusion around them — in part because, unlike most of the changes included in the TCJA that were effective in tax year 2018, the changes to alimony (and separation payments) didn’t go in to effect until tax year 2019. Another source of confusion is that the changes aren’t retroactive. They won’t impact most people who divorced prior to Jan. 1, 2019.
Beginning with divorce and separation agreements signed and finalized in 2019, alimony and separation payments won’t have any tax impact on either person. They are no longer tax deductible for the person paying the money, and they’re no longer allowed to be included as income for the person receiving it.
If your divorce or separation agreement was finalized at any time before last year, you can continue to deduct your payments from your taxable income (if you’re the payer) and you’ll need to report them as income if you’re the recipient unless you made modifications to the terms of those payments in 2019 or later, and you stated in the new agreement that the payments aren’t deductible or reportable.
One of the few — if any — bright spots in having to pay an ex-spouse a significant amount of alimony was being able to deduct it on your taxes. For people paying alimony — particularly those in high tax brackets — that could take a lot of the sting out of the payments. Not surprisingly, without this deduction, divorcing spouses may fight a lot harder to reduce the alimony they have to pay.
If you divorced last year or are in the process of divorcing, it’s wise to discuss the potential impact of various decisions that you make not just with your attorney but with your tax advisor. It’s important to have experienced professionals in both areas on your team.