New Tax Law
The new tax law will have a major effect on spousal support. If you are paying spousal support then, in most cases, you will still be able to claim a tax deduction. If you are receiving spousal support, you will still have to pay taxes on the money you receive. The new tax law will scrap a 75-year-old tax deduction for spousal support payments as of January 1, 2019.
For more information about spousal support click on the following link: Spousal Support
Enactment of the Tax Cuts and Jobs Act
Tax Cuts and Jobs Act (TCJA) will become effective as of January 1, 2019. Under TCJA, spousal support will no longer be tax deductible for the paying spouse and the receiving spouse will no longer be taxed on this income. The TCJA will not affect anyone who signs a divorce agreement before December 31, 2018.
Before the TCJA, payments that met the IRS tax law definition of spousal support (also known as alimony) could always be deducted by the paying spouse for federal income tax purposes. And recipients of spousal support always had to report the payments as taxable income. This old-law treatment continues for spousal support payments made under any “pre-2019” divorce agreement. The TCJA eliminates the tax deduction for payments required under divorce or separation instruments that are executed after December 31, 2018. Recipients of affected spousal support payments will no longer have to include them as their taxable income.
This new tax law, the TCJA, will affect spousal support payments that are modified after January 1, 2019 unless the pre-2019 agreement specifically states that any modification are to continue to be a deduction to the paying spouse and taxable to the receiving spouse – that the “old” tax law applies to any modification.
There’s no change in the federal income tax treatment of divorce-related payments that are required by divorce agreements that are executed before 2019. However, for these payments to qualify as deductible alimony, the paying spouse must still satisfy the time-honored list of specific tax-law requirements. If those requirements are met, alimony payments can be written off above-the-line on the paying spouse’s federal income tax return. That means the paying spouse does not have to itemize to benefit from the deduction. Spouses receiving such payments must include them in their tax filing if their agreement was executed before 2019.
Defining Spousal Support or Alimony
When payments fail to meet the tax-law definition of alimony (also known as spousal support), they are generally treated as either child support payments or payments to divide the marital property. Such payments represent nondeductible personal expenses for the paying spouse and tax-free money for the receiving spouse.
Whether payments required by pre-2019 divorce agreements qualify as tax-deductible alimony or not is determined strictly by applying the applicable language in our beloved Internal Revenue Code and related regulations. In general, what the divorce decree says and what the divorcing couple might intend does not matter. For a particular payment required under a pre-2019 divorce agreement to qualify as deductible alimony, all the following requirements as discussed below must be met.
Written Instrument Required
The payment of spousal support must be made pursuant to a written divorce or separation agreement. Written agreements include divorce decrees, separate maintenance decrees, and separation instruments. The spousal support agreement needs to be in a final settlement or court order and not a temporary agreement in order to maintain the deduction.
Payment Must Be to or on Behalf of Spouse or Ex-Spouse
To qualify as deductible spousal support, a payment must be to or on behalf of a spouse or ex-spouse. Payments to third parties are permitted if they are made on behalf of a spouse or ex-spouse and pursuant to a divorce or separation agreement or at the written request of the spouse or ex-spouse.
Agreements Must State That Payments are for Spousal Support
The divorce or separation instrument cannot state that the payment in question is not spousal support or effectively stipulate that it is not spousal support. All payments must must identified as a deduction for the paying spouse and taxable to the receiving spouse.
Ex-Spouses Cannot Live in Same Household or File Jointly
After divorce or legal separation has occurred, the ex-spouses cannot live in the same household or file a joint return for payments to qualify as deductible spousal support.
Cash or Cash Equivalent Requirement
To be deductible spousal support, a payment must be made in cash or cash equivalent.
Cannot Be Child Support
To be deductible spousal support, a payment cannot be classified as fixed or deemed child support under the alimony tax rules. The rules regarding what constitutes child support, especially what constitutes deemed child support, for this purpose are complicated and represent a nasty trap for unwary taxpayers.
Payee’s Social Security Number Requirement
For the paying spouse to claim a spousal support deduction for payments, the paying spouse’s return must include the receiving spouse’s Social Security number.
No Obligations for Payments to Continue after Death
The obligation to make payments (other than payments of delinquent amounts) must cease if the receiving spouse dies. If the divorce papers are unclear about whether or not payments must continue, applicable state law controls. If under state law, the paying spouse must continue to make payments after the receiving spouse’s death (to the receiving spouse’s estate or beneficiaries), the payments cannot be deductible spousal support. In other words, the payment obligation must cease when the receiving spouse dies in order for the payment to qualify as deductible alimony. Failing to meet this requirement for payments to cease if the receiving spouse dies is the most common reason for lost alimony deductions.
Benefit to Paying Spouse to File
You have a huge incentive to finalize spousal support payments if you are currently in a divorce proceeding. The incentive is the tax deduction you will be receiving on the payment of spousal support. This tax deduction will no longer be available as of December 31, 2018. You will need to enter into an agreement for permanent spousal support before January 1, 2019.
Benefit to Receiving Spouse to Delay
If you will be the receiving spousal support payments, you have a big incentive to put off finalizing your agreement until next year. By waiting, you will avoid being taxed on the spousal support your receive. All payments would be tax-free to you.
Modification of Spousal Support
If you sign a separation or divorce agreement before December 31, 2018 and the spousal support order is modified in 2019 or later, the pre-2019 tax rules would still apply, unless the agreement used specific language stating otherwise.
For more information about modifying spousal support, click on the following link: Modifying Support Payments
Lump Sum Payments
Under the old tax law, to qualify as a spousal support deduction, the payment must have been made in cash. Since payments will no longer deductible, starting in 2019, a divorcee could give the recipient spouse an IRA as a lump-sum payment of alimony.
Lump sum payments shift future taxable income. The higher-earning spouse is shipping off an account that would have saddled them with income taxes if they withdrew cash from it.
When the paying spouse gives an IRA to the supported spouse, the paying spouse is giving money that would have been taxed. The paying spouse is thus getting a deduction.
Prenuptial and Postnuptial Agreements
Do you have a premarital or postmarital agreement that includes a spousal support provision? If so, your agreement could be tied to assumptions about tax implications that soon will be out of date. If your agreement does not address the new tax law, it could be argued that any payments of spousal support is not deductible for the paying spouse and tax free to the receiving spouse.
IRS Spousal Support Requirements
For payments to a spouse to be tax deductible, according to current tax law, they must qualify as spousal support or alimony. According to the IRS, a payment made to a spouse only qualifies as spousal support if the following is true:
- The spouses do not file a joint tax return.
- The payment consists of cash, a check or money order.
- The payment is made under a legal separation or divorce agreement.
- The legal separation or divorce agreement does not state that the payment is not spousal support.
- The spouses do not live in the same home when the payments are made.
- The paying spouse is not obligated to make the payment after the receiving spouse dies, and,
- The money paid is not treated as a part of the property settlement, nor is it treated like child support.
IRS Definition of What is not Spousal Support
The following payments are not spousal support:
- Child support.
- Property settlements that not made in cash.
- Payments made to maintain the paying party’s property.
- The receiving spouse’s use of the paying spouse’s property, and,
- Payments that are made voluntarily; for example, payments made by a husband to his wife that are not included in the separation or divorce agreement.
- You may deduct from income the amount of alimony you paid whether or not you itemize your deductions. Alimony payments are only deductible on Form 1040, U.S. Individual Income Tax Return.
- You must enter the social security number (SSN) or individual taxpayer identification number (ITIN) of the receiving spouse or your deduction may be disallowed and you may have to pay a $50 penalty.
- If you received amounts that are considered alimony, you must include the amount of alimony you received as income. You may only report alimony received on Form 1040, or on Schedule NEC, Form 1040NR, U.S. Nonresident Alien Income Tax Return. You must provide your SSN or ITIN to the spouse or former spouse making the payments, otherwise you may have to pay a $50 penalty.”
California Taxation of Domestic Partners
California now affords Registered Domestic Partners (RDPs) the same rights and responsibilities available to married individuals. For California tax purposes, the same rules applicable to married individuals are now applied to RDPs. This includes filing status, community property income and separate property. However, because the federal government does not recognize RDPs as married individuals for federal tax (IRS) purposes. RDPs will continue to file as unmarried individuals on their federal returns.
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