Prior to 2019, if one spouse paid alimony due to a separation agreement or court order the paying spouse generally could claim the alimony as a tax deduction and the receiving spouse was to pay income tax on the alimony. Many couples would try to contract around this issue or would use this as a negotiation tool in their divorce.
In December of 2017, Congress passed a law (The Tax Cuts and Jobs Act) that significantly changed the way alimony is treated for tax purposes. The law generally states if a spouse is required to pay alimony under a court order or separation agreement that is entered on or after January 1, 2019, they are no longer allowed to claim this as a tax deduction. While paying spouses may not be a fan of this change, the good news for spouses receiving alimony is that they no longer have to claim alimony as income.
This change can have a significant effect on how alimony could be negotiated in your case and could also discourage paying spouses to willingly agree to pay alimony without the deduction, which is why it is important to contact an experienced divorce attorney about your specific set of circumstances.
Hiring a financial planner or a CPA is also an important step in the divorce process. Financial professionals can run various scenarios, including looking at investment or retirement accounts, to ensure you have the best net outcome for paying or receiving alimony.
It is important to note that the new tax law does not affect any agreement entered on or before December 31, 2018.