Alimony Payment Treatment Changes for 2019

The Tax Cuts and Jobs Act (TCJA) made significant changes starting in 2019 to how alimony payments will be treated for both the individual paying alimony and the person receiving the alimony payments. Historically alimony payments are deducted by the taxpayer making the payments as an adjustment to their gross income, and alimony payments are reported as income for the taxpayer receiving the payments. It is important to note that this is the treatment that all alimony payments will receive in 2018 because nothing has changed for the 2018 tax year.

However, starting in 2019, the tax treatment for some alimony payments will change dramatically. To properly inform clients that may be affected by the coming changes to alimony tax treatment, tax professionals should understand the changes coming next year.

Alimony Deductions Starting in 2019

Going forward, how alimony payments are treated will depend on when the parties finalized their divorce and/or if they have modified an alimony agreement that existed prior to January 1, 2019. The TCJA basically reversed the treatment that alimony payments will be given. Under the TCJA, a taxpayer paying alimony can no longer deduct these payments as an adjustment to their income and conversely, a taxpayer receiving the alimony payment will no longer have to include those payments as income. However, any alimony payments made by a taxpayer under an alimony agreement that was in effect on or before December 31, 2018 will continue to receive the historical treatment for both the payer and recipient of the alimony.

This creates three distinct situations for how alimony payments will be treated in future years:

  1. For taxpayers that get divorced (or legally separated) on or after January 1, 2019– Alimony payments are not deductible for the taxpayer making the payments and it is not income for the taxpayer receiving the alimony payments.
  2. For taxpayers that got divorced (or legally separated) prior to January 1, 2019 and are paying or receiving alimony under an agreement or court order that is dated on or before December 31, 2018 – Alimony payments remain deductible for the taxpayer making the payments and remains income for the taxpayer receiving the alimony payments. Many times, parties get divorced and enter into an agreement or have a court order that establishes the alimony payments and it remains in effect and unmodified for years. As a result, some taxpayers may continue to deduct alimony payments or recognize alimony as income for many years into the future because the underlying alimony agreement or order will remain unmodified and dated on or before December 31, 2018.
  3. For taxpayers that got divorced (or legally separated) prior to January 1, 2019 and are paying or receiving alimony under an agreement or court order that is dated after December 31, 2018 – Alimony payments are not deductible for the taxpayer making the payments and it is not income for the taxpayer receiving the alimony payments. In this situation the parties were divorced prior to January 1, 2019 but have modified their alimony agreement or have gone to court after December 31, 2018 and received a new court order that modified the alimony payments.