The IRS taxed alimony the same way for many years, but all that changed under the 2017 Tax Cuts & Jobs Act (TCJA). The changes greatly impact divorce negotiations and can lead to confusion for people who were divorced prior to the new law.
Nothing Changes for Couples Divorced Before January 1, 2019
If your divorce was final before January 1, 2019, then the IRS treats alimony payments as it always has. The person paying the alimony claims the amount paid as a deduction from their income, and the person receiving alimony includes the alimony as income on their tax return.
It is important to remember that if you make any modifications to your divorce agreement after December 31, 2019, you could inadvertently fall under the changes made by the TCJA. So, be sure to be careful and seek the advice of someone knowledgeable about tax laws like an attorney you consider to be the best IRS tax lawyer in Florida.
Modifying a Divorce Decree for Alimony When Divorced Before January 1, 2019
If you choose to modify your divorce decree so the new tax laws alter it, then you must do two things:
1. The changes made need to alter the terms of the alimony or separate maintenance payments.
2. The altered agreement or modification made must specify clearly that the amount in alimony paid will not be deductible from income, and the amount the person receives will not be included as income.
So, if you want to fall under the new tax law, then you must do both these things. Conversely, steer clear of meeting both these wickets if you don’t want your tax status to change if you alter your divorce decree.
The Changes for Couples Divorced as of January 1, 2019 Apply to Divorce Decrees, Written Separation Decrees, and Maintenance Decrees
If your divorce was finalized on January 1, 2019 or later, then your tax status for alimony will be completely different than anyone else divorced since the 1940s. The government determined that this change in how alimony is handled would save $6.7 billion over 10 years, which it said would help make up losses to the government treasury.
However, there is some debate on that point, and it left many couples, tax experts, and attorneys scrambling to do the best they could to save divorcing couples money when the divorcing couples were arguing over or agreeing to alimony payments.
Specifically, the new tax law states that the person paying alimony will no longer get to deduct that amount from their gross income. Also, the person receiving the alimony will no longer have to claim it as income on their tax return.
That completely changes the ball game for divorcing and separating couples where alimony is an issue. The tax deduction was sometimes used as a way to get an agreement from the high income earning spouse, because a deduction in income for tax purposes was generally considered a benefit for someone in a high income bracket.
The new law also has an effect that could surprise spouses that use some of the alimony payments to invest. Previously, spouses receiving alimony could use that money that was taxed to invest in an IRA or a 401(k). They can no longer do this because the money is not taxed. Now, the person receiving alimony will have to find a taxable savings or retirement account in which to invest that money.
The Payment Must Be Alimony or Maintenance Under IRS Rules
The IRS has particular rules about what they consider alimony or separate maintenance. Therefore, it is important to get the advice of one of the best IRS tax lawyers in Florida before finalizing your divorce or separation, so you do not get caught unawares when entering into a divorce or filing your tax returns.
The IRS states that for the payment to be alimony or maintenance:
1. The parties cannot file a joint tax return;
2. The payment cannot be for child support;
3. The payment cannot be for a property settlement;
4. The parties cannot live together;
5. The payment must be made cash (which includes checks etc.);
6. No payments can be required after the death of the person receiving the money; and
7. The payments are made pursuant to a divorce or separation decree between spouses.
The divorce or separation decree does not have to be a permanent order. As couples navigate divorce proceedings, temporary orders and decrees are entered to cover the time between when the divorce is started and finalized. Those fall under number 7 above.
As long as payments made fall under the rules discussed above and do not violate them, they are considered to be a form of alimony by the IRS and will not be deducted from the payer’s gross income under the new law. It will also not be included in the gross income of the person receiving the payment.
The IRS also lists what is not alimony or separate maintenance under the new tax law:
1. Child support;
2. Property settlements that are not in the form of cash;
3. Any money which is used to take care of the payer’s own property or to use the property;
4. Community property income; and
5. Any payments made that are not required by some sort of written decree or agreement in the divorce or separation.
Any of these types of payments are not alimony or separate maintenance and fall under a different portion of the tax code. If you have made any of those payments and are not sure how to approach them on your tax return, the it is best to contact the best IRS tax lawyer in Florida for help.
Review your Prenuptial Agreements
If you and your spouse have a Prenuptial Agreement, chances are it was written before the TCJA. If so, then the tax benefits and detriments of alimony payments were likely a part of your strategy in preparing the Prenuptial Agreement. With the new law, it is worthwhile to review the prenup and make any changes needed so both spouses are treated fairly in light of the recent tax changes.
Get the Help You Need by Contacting an Experienced Debt Solutions Attorney in Florida
The Law Office of Mary King P.L., a seasoned debt solutions attorney in Florida, offers complete IRS problem solving services including all areas from tax implications of alimony to planning the most efficient tax strategy for individuals and businesses. Call our debt solution attorneys in Florida today to schedule an initial consultation. With years of experience, the Law Office of Mary E. King can make sure that your tax issues are resolved in your favor. Fill out our online contact form, or call us at 941-906-7585.