Divorce can be tough, both emotionally and financially. This becomes even worse for people who land on the wrong side of the alimony wagon – the added grief of figuring out the financials makes coping with the separation even worse.
The financial arrangements can get tricky, especially with the ever-changing tax laws and their seemingly confusing implications on alimony proceedings. In the midst of all chaos and confusion, trusting your attorney become inevitable. However, it helps to brush up a little on the latest tax reforms on your end, as well. This will help you understand the process a bit better and even take your mind off the emotional side of things by getting you to work out the logistics of it all.
The Tax Cuts and Jobs Act(TCJA) is a tax reform which has had a significant impact on alimony payments and proceedings. Given the fact that it is a relatively new law, its implications are still not clear to everyone. To help ease one of the most challenging periods of your life, we bring you a cumulative rundown on the impact of TCJA on legal proceedings related to divorce.
Pre-TCJA, alimony payments were eligible for deductions from federal income taxes and also mandatory to be reported by the receiver as a part of their taxable income.
However, with the introduction of TCJA, there have been some changes. What’s important to note is that the old rules still apply to alimony payments made under pre-2019 divorce arrangements. However, 2019 onward, the changes in tax laws will apply to alimony payments.
The new law states that divorce or separation instruments exercised post the 31st of December, 2018 will no longer stand deductible from federal income taxes. Also, this means that receivers no longer need to report such payments as taxable income.
This law has been stated to be applicable for:
- Divorce or separation instruments executed after 31st December 2018.
- Modified after that date, if the modification documents specifically mention the applicability of the new TCJA laws.
The new rules clearly make divorces more expensive for the ones paying alimony because they lose out on major tax deductions.
On the other side, this comes as a relief to the people receiving alimony payments as their taxable income will decrease substantially.
For Pre-2019 Arrangements, It’s Business As Usual
While the post-2019 divorces will follow the new guidelines as per TCJA, the old arrangements made pre-2018 will follow the initial tax rules and report the alimony payments accordingly. However, for the said alimony payments to be deductible, it is important that the taxpayers still meet the age-old list of specific tax-law requirements.
If the required guidelines are met, the taxpayer can enjoy itemized free deductions on their alimony payments. Also, the recipients are required to show the payments received in their taxable income.
The Other Side
If the alimony payments fail to meet the requirements for tax deductions, they are cited as child support payments or payments to divide the marital property. This further categorizes them as a personal expense on the payee’s end and tax-free for the recipient.
Requirements For Deductible Alimony
As with everything, the IRS has a pre-set list of codes and regulations for alimony payments to be considered tax deductible. They include the following:
Written Instrument Requirement
The payment must be made for arrangements made on paper. This includes divorce arrangements, decrees, and even separation instruments.
Payments Must Be Addressed To The Spouse (or Ex-Spouse)
To qualify as deductible, the payments made should be in favor of the spouse or the ex-spouse only. Payments made to third parties including attorneys, mortgage lenders, etc., are allowed as the recipients on behalf of the partner if this has been mentioned in the written arrangement on request of the ex-spouse.
Payment Cannot Be Stated As Anything But Alimony
For alimony to be considered tax-deductible, it is important that it be mentioned as alimony in the written arrangement. If the payment is mentioned as anything else, it loses its deduction eligibility.
Ex-Spouses Cannot Live In The Same Household or File Jointly
Once legal separation has been finalized, ex-spouses cannot live together or even file taxes jointly. If they are found to have the same residential address, the payments would automatically stop being tax-deductible.
Cash Or Cash Equivalent
For alimony payments to be tax deductible, they need to be made out in cash or cash equivalent arrangements.
Cannot Be Child Support
As mentioned earlier, alimony payments cannot qualify as child support if they are to be tax-deductible.
Payee’s Social Security Number
For the payment to qualify as tax-deductible, the payer’s return must contain the payee’s social security number.
No Obligation To Make Payments Post Payer’s Demise
For the alimony payments to qualify as tax-deductible, the obligation for the payments needs to end with the death of the payer.
The Last Word
For people currently involved in divorce proceedings, it is an obvious win for the recipient while it means a huge financial burden for the payer in the term of tax liabilities.
For arrangements made prior to 2018, it is important that you maintain adherence with the aforementioned guidelines for continued tax benefits associated with your alimony payments.
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