In 2017, and effective January 1, 2019, a new tax regime was enacted by Congress which, amongst a variety of changes, permanently eliminated the tax deduction for alimony payments made by supports spouses, either ordered, or otherwise agreed upon, in a divorce on January 1, 2019 or later. Further, the TCJA permanently removed the requirement for dependent spouses to claim the alimony payments received as taxable income, potentially resulting in a tax liability, owed by the dependent spouse, on the alimony payments received by the dependent spouse.
At the time the tax implications of the TCJA went into effect, it was clear that while all payments of alimony established in a divorce on January 1, 2019 no longer resulted in a taxable event. It was also clear that any divorces finalized, either by Order or Separation Agreement, prior to January 1, 2019, continued to be a taxable event in the which the payment of alimony was tax deductible to the supporting spouse, and taxable as income to the dependent spouse.
As divorces are now nearly 1 year removed from the effective change of the tax treatment of alimony, it still remains uncertain as to the long-term effects of the implication of the new tax treatment of alimony payments under the TCJA. However, as is often the case, court-ordered alimony payments, as well as payments of alimony provided for in a Separation Agreement, assuming proper language for a modification of the alimony payments is provided in the Agreement, are subject to modification.
Consequently, the treatment of alimony payment established prior to January 1, 2019, however subsequently modified after that date, has been a topic of discussion. The Internal Revenue Service has published at least one article to further clarify the treatment of alimony payments provided for in a Court Order or Separation Agreement executed on or before December 31, 2018, however subsequently modified on or after January 1, 2019. The IRS has opined that any alimony payments modified on or after January 1, 2019 fall under the new tax law, as established by the TCJA, and are therefore non-taxable, only if the modification:
- Changes the terms of the alimony payments; and
- States the alimony payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
Accordingly, the language provided for in any subsequent Court Order or Separation Agreement is key in determining the tax treatment for all subsequent tax payments made pursuant to the Order or Separation Agreement modifying the alimony payments.
If you have a case involving an alimony claim, or are seeking the modification of alimony, please contact our Family Law partner Eric S. Meredith to assist you.