Tax Effects of Alimony

The rules governing the treatment of alimony for tax purposes recently underwent a major change. According to the Tax Cuts and Jobs Act, passed in December 2017, the payment of alimony cannot be treated as a deduction from the paying spouse's income for tax purposes. Similarly, receiving alimony payments does not have to be reported as income for the receiving spouse for tax purposes. The tax incentive behind alimony payments had been removed. This will likely affect how many people think about alimony and may make negotiating for alimony a bit more difficult. For example, prior to the new law, one could negotiate for alimony payments by assuring the paying spouse that any payments they make could be deducted from their taxes. That is no longer the case. For any divorce agreements finalized after December 31, 2018, the above rule applies.

Prior to the passage of the 2017 Tax Cuts and Jobs Act, Alimony was treated differently. Before the 2017 Tax Cuts and Jobs Act, the paying spouse would treat the payment of alimony as a deduction for tax purposes. The receiving spouse would treat the receipt of payment as income. This would ease the tax burden of the paying spouse but it would also increase the tax burden of the receiving spouse. These tax implications were often used in alimony negotiations before the law change.

The previous law gave a tax incentive to the paying spouse, which sometimes made it easier to negotiate for alimony. The paying spouse could take comfort in knowing that they could deduct their alimony payments and lower their tax burden as a result. Be aware that without the tax incentive, it may be more difficult to negotiate for alimony during a divorce.