CHICAGO – As a result of the Tax Cuts and Jobs Act, the tax deduction for spousal support, also known as alimony, will no longer exist after Jan. 1.
The Internal Revenue Service has allowed deduction of alimony for decades, with the recipient ex-spouse required to report the payments as taxable income. That, however, is ending, as the tax law severely limits itemized deductions, switching to a higher standard deduction.
As a consequence, couples who get divorced will face non-deductible payments, and that income will be treated like child support, which is non-taxable.
Attorney Sanford Millar of Millar Law Offices in Los Angeles told the Cook County Record that "there are approximately 2.25 million marriages each year and approximately 900,000 divorces." Nevertheless, "since the deduction is 'above the line,' a taxpayer does not need to itemize to take the deduction."
The attorney mentioned that could result in a higher bill to pay.
"The loss of the deduction results in a potentially higher tax rate on the income paid in spousal support," Millar said.
While the matter may have not received more attention since Congress passed the law earlier this year, Millar said the deduction "has received a lot of attention among those who are or may be affected, and particularly among tax lawyer and family lawyers who are counseling clients daily."
As to what divorcing couples should do regarding the change, Millar has clear advice.
"Push their lawyers to get an agreement that can become an 'entered' and final court order by Dec. 31, 2018," Millar said, considering that divorce agreements made until that date will not be covered by the new provisions as the old rules will still be valid on those cases.
Millar said there may be a rush to settle divorces during the holidays, but noted "it depends on each case."
"The parties have potentially opposing motivations to be subject to either the current law or the TCJA and both parties must be in agreement on the alimony," he said. "Then the IRS has a well-known seven factor test to determine if a payment incident to a divorce is really alimony or an attempt at a disguised property settlement or child support."