Our guest blogger today is Courtney Barbee from The Bookkeeper in Raleigh, North Carolina. Courtney was gracious enough to provide us with a better understanding of what impact on Alimony the tax law changes starting in 2019 will have. The Bookkeeper is a family-owned local business that specializes on accounting solutions.
In 2015, the Internal Revenue Service made an observation. 361,000 taxpayers claimed to have paid a total of $9.6 billion in alimony, however, only 178,000 people reported receiving spousal support. This leads one to believe that there were many taxpayers not reporting the alimony they received.
There are many methods by which the IRS can address unreported income, but the changes instituted by the 2018 Tax Cuts and Jobs Act were unexpectedly drastic. In Title I Part V, (Sec. 11051) This section repeals the deduction for alimony or separate maintenance payments from the payor spouse and the corresponding inclusion of the payments in the gross income of the recipient spouse. (https://www.congress.gov/bill/115th-congress/house-bill/1) IRS Topic 452 goes into greater detail of the current law, requirements, and what constitutes alimony. (https://www.irs.gov/taxtopics/tc452)
To save you the trouble of parsing IRS publications, we’ll break down what constitutes alimony, what’s changed, and what the effects will be.
WHAT IS CONSIDERED ALIMONY?
The IRS has eight listed requirements for what constitutes alimony payments. They are:
1. Written instrument requirement. This means it is mandated by a written divorce or separation decree, or some other document issued by a judge.
2. To or on behalf of a spouse or ex-spouse.
3. Can’t be stated to be “not alimony”. Sometimes, payments may be ordered by a judge, but will be specified as to being for a cause which is “not alimony”.
4. Cannot live in the same household nor file jointly. If the payor and payee are still living in the same home, or are filing their taxes jointly, the payment is not considered alimony.
5. Must be cash or cash equivalent.
6. Not child support.
7. Payer's tax return must include payee's social security number.
8. No obligations for payments to continue after payee's death.
WHAT HAS CHANGED?
For divorces and separation agreements (or other written instruments) executed before December 31st, 2018, nothing will change. On the payor’s side, alimony deductions can still be written off “above the line”, and will not require an itemized tax return in order to be deductible. Likewise, payees under these agreements will still be required to report alimony as taxable income.
For 2019 going forward, alimony agreements will be treated completely differently on a tax basis. To fulfill the definition of “alimony”, they will still need to fit the eight criteria listed above. However, payors will no longer be allowed to deduct alimony payments. Likewise, payees will no longer have to report income from alimony payments.
WHAT WILL THIS MEAN?
On the surface, it appears as though this might be a big benefit for alimony recipients, 98% of whom are women (out of 243,000 recipients, according to the US Census Bureau).
However, the potential negative impacts from this law change are enormous. For starters, it will cost taxpayers more money. Since alimony payors are typically in a higher tax bracket, this increase of on-paper income will result in more money being paid in federal taxes. (Essentially the payor is paying the taxes on the alimony, as opposed to the payee.)
Again, this seems like it might benefit payees, but it will likely lead to more contested (and much messier) divorces. Tax relief is often used as an incentive to help move payment negotiations along; with less opportunities to negotiate in settlement, more cases will go to court. Some people will not feel they can “afford” to get divorced, while others might rush to finalize divorces in 2018.
It will also be more difficult for payees to save for retirement. Alimony is often used to assist in such things as IRA contributions. Retirement accounts require that funds come from taxable income; since alimony is no longer taxable, it can no longer be used to contribute to retirement.
KEEP IN MIND…
To further complicate the matter, each state has its own rules on alimony, and laws are constantly changing. If you find yourself in a position where you might be affected, please speak with a family law attorney, such as those at Felton Banks.
**DISCLAIMER** FELTON BANKS, PLLC DOES NOT SPECIALIZE OR PRACTICE TAX LAW. THIS BLOG POST IS NOT INTENDED TO BE REGARDED AS TAX ADVICE FROM OUR ATTORNEYS OR FELTON BANKS AS A FIRM. IF YOU HAVE TAX RELATED QUESTIONS PLEASE CONTACT THE PROFESSIONALS AT THE BOOKKEEPER, WHO CREATED THE CONTENT IN THIS GUEST BLOG POST.