For years, tax prepares have reported payments that meet the requirements (under 71(b)(2)) as deductible alimony by the payer, along with the recipient’s Social Security number, to ensure the recipient reports the matching amount as income. The taxpayers must have a written divorce or separation agreement, and the agreement must meet several tests to be considered alimony. These requirements are still applicable despite the changes made by the Tax Cuts and Jobs Act (TCJA).
These requirements are:
- The payment must be in cash or cash equivalents.
- The payment is made to or on behalf of a spouse or former spouse.
- The payer’s obligation to pay must end upon the recipient’s death.
- The payer and the payee do not file a joint return with each other,
- Payments are made after the divorce or legal separation is final (they are no longer married for tax purposes), and the payer and payee cannot be members of the same household at the time the payments are made.
- The divorce or separation agreements does not date the payment is not alimony for income tax purpose.
- The payment cannot be disguised as child support.
Under the new law, there is no longer a deduction for the alimony by the payer, which eliminates the inclusion in income by the recipient. This treatment only applies to divorces and legal separations that are executed under court order after 2018. This rule, however, does not apply to divorces and separation agreements that were in effect before December 22, 2017, and executed after December 31, 2018.
Special provisions state that if taxpayers have an existing (pre-2019) divorce or separation agreement, and that agreement is legally modified after December 31, 2018, the new rules will apply to the modified section of the divorce or separation agreement only.
This modification provision could be a beneficial change to taxpayers, especially in cases where the alimony received causes the taxpayer to be in a significantly higher tax bracket.
At Bourke Accounting we often wonder why certain tax law changes happen and we’ve come up with a few “conspiracy theories” simple because some just don’t make sense (although we are versed and ready to help you with them). Give us a call today at 502-451-8773, or come by for a visit as we’d love to hear any of your conspiracy theories. See you soon!