Under present tax law, alimony remains deductible to the payor and taxable to the recipient. However, starting January 1, 2019 this will no longer be the case under section 11051 of the new tax bill. This section modifies the various Internal Revenue Code sections governing the tax treatment of alimony.
Alimony, pursuant to any divorce or separation agreement entered into after December 31, 2018, will be subject to this new provision. Pre-2019 agreements can contain language to opt-in to this new law or be modified to do so. Alimony payments under such an agreement would still be taxed to the recipient (and deducted by the payor) in 2018, but starting in 2019 such payments would not be deductible or included in income.
There are two main rationales behind this rule:
- Help close the tax gap—the Treasury Inspector General for Tax Administration (TIGTA) arrived at a figure of $2.3 billion alimony taken as deductions but not reported by the recipients in 2010, per its most recent report on the subject. This translates into $352 million in lost tax revenue that year alone.
- Eliminate what Congress perceives as tax arbitrage—typically alimony is paid by the higher earning spouse to the lower-earning spouse. Under the present tax law, income is potentially shifted from a high tax bracket to a lower one.
This new law will drastically change how alimony is determined since the tax cost to the payor and the tax-free income to the recipient must both be taken into account when calculating a support payment fair to both parties.
A tax advisor familiar with the tax aspects of divorcing couples plays an important role in arriving at a just outcome. For questions about this and any other tax matter, please contact Laurence C. Rubin, CPA, Tax Controversy lead partner, at 301.222.8212.