Alimony and spousal maintenance have become a staple of most divorce proceedings. Making regular payments to an ex-spouse is a rough pill to swallow.
In the past, the spouse making maintenance payments had a sliver of silver lining in the cloud: the payments were tax deductible for the payor and taxable to the recipient.
That silver is now gray.
The Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017, removed that favorable tax treatment of maintenance payments and treats them like child support. Specifically, the Act removed the deduction for payment of maintenance, simultaneously removing the taxability of alimony and maintenance payments received. Thus, a spouse paying maintenance must pay tax on those payment amounts while the recipient receives them tax-free. This is more consistent with nontaxable property settlements.
This has no effect upon the tax treatment of child support payments or transfers of property between spouses or incident to divorce.
The change in the law only applies to divorce or separation instruments executed after December 31, 2018, or executed on or before December 31, 2018 and modified after December 31, 2018 expressly to address spousal maintenance. So, those who were divorced before December 31, 2018 need not worry themselves over this change unless they want to specifically incorporate it into their divorce decree.
This modification of the law may affect future divorce negotiations. Spouses required to pay spousal maintenance will want to reduce these payments by the amount of the lost deduction and the windfall the recipient will receive from a tax-free payment.
Going forward, divorce attorneys should carefully scrutinize alimony amounts to account for the cost of the lost deduction.
Contact a member of SKO’s Tax practice for more information regarding the Tax Cuts and Jobs Act of 2017, and how you may be affected.