Changes to the federal tax laws that took effect in 2019 eliminated the few advantages for paying alimony. The long-standing deduction for alimony payments was eliminated.
Tax Cuts and Jobs Act of 2017
The tax law was changed to address tax underreporting. Tax returns of alimony recipients showed less income than supported payments reported on the returns of payers of alimony.
Under the TCJA, the payor spouse may no longer deduct alimony for divorce or separation agreements executed after 2018. This change seemingly eliminates complicates issues in pre-2019 divorces such as what payments constitute alimony and tax treatment of support paid to third parties as a proxy for alimony.
Alimony is no longer taxable income for the recipient spouse. for divorces that were finalized before Jan 1, 2019, however, alimony is still deductible to the payor spouse and taxable income for the recipient.
The TCJA also eliminated the disputes over dependency. There are no deductions for dependency from 2018 to 2025.
But this deduction will take effect again in 2026. If a spouse is undergoing a divorce in 2022 and still has young children, they should consider this future deduction in settlement negotiations and who will receive this deduction beginning in 2026.
Under tax law, the spouse who has legal custody is entitled to this exemption regardless of what is in the divorce settlement agreement. But the spouses can enter an agreement addressing which spouse may take the dependency exemption deduction. If the noncustodial parent gets the deduction under a settlement agreement, that parent may take this exemption only if the custodial parent executes IRS form 8322.
Child support is not taxable for agreements entered before or after 2019. But child support is fully deductible to the payor spouse and taxable to the recipient spouse if a pre-2019 requires unallocated alimony and child support.
However, if the unallocated amounts were reduced when a child reaches 18, that portion of the unallocated support is not actually unallocated. That portion constitutes child support and is not taxable or deductible for the spouses.
Tax issues may also involve property settlements, sale of residence, business activities and pensions. Spouses can divide property to make up for tax gains and losses. Attorneys may provide options to spouses and help them seek a fair and reasonable settlement.