Alimony Payments After 2018
Under the Tax Cuts and Jobs Act of 2017 (TCJA), the taxability of alimony has been modified effective for divorce or separation paperwork filed after 12/31/2018. There are also special rules for divorce or separation instruments in existence before 2019 that have been modified after 12/31/2018.
It is important to know what tax rules govern your federal taxes if you are a divorced or separated individual who either pays or receives alimony.
Pre-2019 Divorce Agreements
For divorce or separation instruments entered before 2019 the old rules continue to apply. Alimony continues to be deductible by the payer and is taxable income to the recipient and qualifies as earned income for an IRA deduction.
Post-2018 Divorce Agreements
For divorce or separation instruments entered into after 12/31/2018, alimony is no longer deductible by the payer, and it is not income to the recipient and no longer qualifies as earned income for an IRA deduction.
Modifications After 12/31/18
Divorce or separation instruments entered before 2019 and modified after 12/31/18 continue to follow the pre-2019 rules and alimony continues to be deductible by the payer and taxable to the recipient. However, if a pre-2019 divorce or separation instrument is modified after December 31, 2018, the alimony can be subject to the post-2018 rules if the modification expressly provides for post-2018 treatment. (Committee reports, TCJA Section 11051) This gives couples the ability to choose between the pre-2019 rules or the post-2018 rules when they modify their agreement after December 31, 2018. This flexibility allows them to negotiate what is best both financially and tax wise for both parties.
“ Example: Fred and Frieda divorced in 2015, and their divorce decree specifies that Fred is to pay Frieda $20,000 per year of alimony. In 2022 Frieda requests an increase in alimony to $32,000, and Fred counters with a proposal to keep the alimony at $20,000 but to make the alimony tax free by a “modification” to the original decree. ”
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"Executed" Date
TCJA specifies that the tax treatment of alimony changes for any divorce or separation agreement “executed” after December 31, 2018. The issue is with the terminology “executed.” It is not a question of when the divorce is final or when the paperwork was signed by the judge or recorded – it’s when the “divorce or separation instrument. . .is executed”. (TCJA Sec 11051(c))
Note: Although TCJA repealed IRC Section 71 it still referred to it for the definition of a divorce or separation agreement.
"Separation Agreement"
Sec 71(b)(2) prior to repeal by the TCJA defines a “Divorce or separation instrument” -
The term 'divorce or separation instrument' means—
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a decree of divorce or separate maintenance or a written instrument incident to such a decree,
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a written separation agreement, or
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a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.”
The following are quotations from Tax Court cases.
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Keegan v Comm TC Memo 1997-511: “The term ‘written separation agreement’ (as used in section 71(b)(2)) is not defined by the Code, the legislative history, or applicable regulations”.,
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Bogard v. Commissioner 59 TC 97, 100 (1972): “Logically, it appears Congress was interested in a clear statement in written form of the terms of support where the parties are separated; correspondence between the attorneys representing the husband and wife does not constitute a written separation agreement within the meaning of section 71(a)(2)”.
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Ewell v. Commissioner TC Memo. 1996-253 – “The term “written separation agreement” is not defined by section 71(b)(2), its legislative history, or the Commissioner's regulations. A written separation agreement is a clear, written statement of the terms of support for separated parties. It must be a writing that constitutes an agreement”.,
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Other court cases of interest include: Grant v. Commissioner TC 809, 823 (1985); Kronish v.
Commissioner TC 684, 693 (1988; Nemeth v. Commissioner TC Memo 1982-646; and Osterbauer v. Commissioner TC Memo. 1982-266