In divorce situations, one spouse or ex-spouse may become legally obligated to make payments to the other party in the form of alimony or maintenance. Since these payments are often substantial, locking in tax deductions for the payer has often been a substantial issue.
Before the new Tax Cuts and Jobs Act (TCJA), payments that met the tax-law definition of alimony could always be deducted by the payer for federal income tax purposes. And recipients of alimony payments always had to report the payments as taxable income. This old-law treatment continues for alimony payments made under pre-2019 divorce agreements. But for payments made under post-2018 agreements, things change dramatically. For payments required under divorce or separation instruments that is executed after Dec. 31, 2018, the new law eliminates the deduction for alimony payments. Recipients of affected alimony payments will no longer have to include them in taxable income. This TCJA treatment of alimony payments will apply to payments that are required under divorce or separation instruments that are: (1) executed after Dec. 31, 2018 or (2) modified after that date if the modification specifically states that the TCJA treatment of alimony payments (not deductible by the payer and not taxable income for the recipient) now applies. This is a significant factor for negotiating or litigating these types of issues.