The Tax Cuts and Jobs Act, which passed into law in December 2017, repeals the deductibility of spousal support (also called “alimony”) for those paying support to their former spouses.
Until now, spousal support payments have been deductible from the taxable income of the paying spouse, and were added to the taxable income of the recipient spouse. The benefit of this deductibility is that it takes the spousal support income out of the higher-earner’s tax bracket, and causes it to be taxed at the lower-earner’s bracket—thereby keeping more money away from the IRS and available to be shared between the parties.
With this new change in the law, spousal support income will be taxed at the higher-earner’s income bracket before it is paid to the lower-earner, such that more money will be paid to Uncle Sam and less will therefore be available to be shared between the parties.
For this reason, many divorcing couples are racing to reach divorce settlements prior to the December 31, 2018 deadline, after which the repeal of deductibility takes effect.
Section 11051(c)of the Tax Cuts & Jobs Act provides: Effective Date.–The amendments made by this section shall apply to–(1) any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 2018, and (2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.
IRC 71(b)(2)states: The term “divorce or separation instrument” means—
(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.
Most divorce law attorneys and financial professionals are interpreting the new law to mean that if an agreement providing for the payment of spousal support is signed on or before December 31, 2018, the deductibility of spousal support for the paying spouse will be preserved, benefiting both parties.
However, there is some concern that the IRS could take the position in the future that the spouses must have been legally divorced, and any “separation agreement” incorporated into a final divorce order entered by a court, by the December 31 deadline in order for the paying spouse to be able to deduct spousal support payments from his or her taxable income. If this outcome were to come to fruition in a year or two, it would have significant negative consequences on individuals who deduct their spousal support payments from on their 2019 tax returns, only to find out that they do in fact owe that additional tax.
There’s also the impact on the parties’ agreement regarding the amount of spousal support to be paid, which will have been based on the assumption that the payments are deductible to the payor if the parties’ agreement is signed on or before December 31, 2018. If that assumption is later determined to be incorrect, it will impact the payor’s ability to make the payments and lead to a multitude of cases where the parties are faced with re-negotiation or re-litigation of spousal support.