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For Many, the Financial Implications of Divorce Are About to Change

Taxes with a hand

Historically, Americans paying alimony to a former spouse have been able to deduct alimony payments from their taxes, often benefitting from a significant tax break depending on the size of the payments and the difference in earnings between the spouses. But starting in 2019, the new Tax Cuts and Jobs Act (TCJA) will eliminate deductions (and the resulting tax break) for alimony payments, and, vice versa, alimony recipients will no longer have to report payments as taxable income. Perhaps most importantly—for now—divorce agreements signed before the end of 2018 will still qualify for the annual deduction.

Whether alimony payments required by pre-2019 divorce agreements qualify as tax-deductible or not is determined by applying the Internal Revenue Code and related regulations, as follows:

The payment must be made pursuant to a written divorce or separation instrument, such as a divorce decree, separate maintenance decree, or separation agreement.

  • The payment must be to or on behalf of a spouse or ex-spouse.
  • The divorce or separation instrument cannot state that they payment is not alimony or effectively stipulate that it is not alimony because it is not deductible by the payer or not includable in the payee’s gross income.
  • Ex-spouses cannot live in the same household or file taxes jointly.
  • The payment must be made in cash or a cash equivalent.
  • The payment cannot be child support.
  • The payer’s tax return must include the payee’s Social Security number.
  • The obligation to make payments must stop after the recipient’s death.

It’s important to note that while child support payments have never been deductible (regulation #6 above), payments that are meant to help a divorcing spouse and children at the same time are deductible. That deductibility will also end for any new or modified divorce agreements starting in 2019.

According to the IRS, about 600,000 taxpayers currently claim an alimony payment deduction each year, of which about 20% are in the top 5% of household income earners. The Joint Committee on Taxation estimates eliminating the tax break will increase federal revenues by $7 billion over the course of a decade.

If you have questions about divorce and alimony law in New Jersey, please contact the Union, NJ law office of John B. D’Alessandro at 908-964-0102. When you’re facing divorce, it’s never too soon to begin assessing your options and protecting your rights, especially when your financial future depends on the decisions you make today.

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