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Alimony Deadline is December 31, 2018 for Tax Deductions

Alimony Deadline is December 31, 2018 for Tax Deductions
Under Tax Cuts and Jobs Act

Couples currently undergoing divorce proceedings need to be aware that they have until December 31, 2018 to have their divorce orders signed in order for them to be deductible.  Under the Tax Cuts and Jobs Act of 2017 (TCJA), agreements executed in 2018 will retain the default of alimony being deductible by the payer and taxable to the recipient. 

What does this mean? If taxpayers have a pre-2019 divorce or separation decree and they legally modify it, the new rules under the TCJA do not apply unless the modification expressly provides that it should apply.  Therefore, existing divorced couples and couples who settle their divorces before 2019 will be able to maintain the current deductibility of alimony/maintenance after 2019 and for as long as they pay for it. 

For divorce agreements executed in 2019 and after, payments between former spouses will no longer be deductible to the payer/taxable to the recipient.  In effect, the payments will be treated similar to how child support is treated.  Without the tax deduction as an incentive, 2019 alimony payments will likely decrease so that the payer is out-of-pocket for the same amount as they would have been under the old rules. Even accounting for the recipient’s tax savings, this means they will likely end up with less than they would have under pre-TCJA.  It’s a lose-lose situation for both sides. 

Bottom line: If the spouses can agree to the terms of their proposed divorce settlement, it is likely in their best interest to settle prior to January 1, 2019.

For additional information, email us at info@herbein.com, or click here to read more about the author Keith Hoffman, CPA, CDFA.