Until recently, alimony was deductible by the payor spouse and reportable as income to the dependent spouse.
As of 2018, under federal and state income tax law with regards to alimony, the new tax code change repeals the law that allowed the payor of alimony to make tax deductions on their alimony payments, thereby making it more affordable for them and also helping them save on taxes in their personal income.
To sum up all of the changes,
- There will be no more alimony deductions for payers for alimony agreements or alimony, subject to the effective date rules of the new Alimony Statute.
- Payees will not report alimony as income if the agreement or court order for alimony is entered into after the effective date of the new Alimony Statute, subject to the effective date criteria of the new Alimony Statute.
- Effective date: The amendments made by this section shall apply to—
- 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
- 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.
Under the recapture rule, a spouse who pays alimony will be required to recapture any excess alimony paid during the first three years after the parties separate. The three-year time period begins in the first year that the spouse makes alimony payments to the other spouse. The recapture calculation is viewed by many as extremely complex.
In general, if the amount of alimony paid in year three, plus $15,000, is less than the amount of alimony paid in year two, the excess will be recaptured. In addition, if a comparison of the first year’s payment to the average of payments made in years two and three show that the average of years two and three, plus $15,000, is less than the amount paid in year one, the excess amount will again be recaptured.
The spouse who paid the excess amount would then have to include that amount in his or her income and pay taxes on it, while the spouse receiving the excess amount would get to take a corresponding deduction. This potential tax pitfall catches many divorcing couples off-guard and should definitely be discussed with both your divorce lawyer and your tax advisor.
