Is Your Alimony Deduction at Risk?

Alimony payments – referred to in Wisconsin courts as maintenance payments – have always been a hot-button negotiating point in divorce agreements.

The recipient of the payments routinely points out that the classification of payments as alimony is beneficial to the payer, while adding income to the recipient, for tax purposes.

The new Tax Cuts and Jobs Act (“TCJA”) may be swinging the negotiating pendulum in the opposite direction.

Before the new TCJA, payments that met the tax-law definition of “alimony” were deductible by the payer for federal income tax purposes. Conversely, the recipients of alimony payments were required to report the payments as taxable income.

The TCJA dramatically changes the treatment of alimony payments for all divorce and separation instrument (“divorce agreements”) executed after December 31, 2018.

The TCJA eliminates deductions for alimony payments required by post-2018 divorce agreements. creating a potentially significant increase in taxable income for the former spouse saddled with making the alimony payments.

The TCJA also provides a reciprocal tax break for the recipients of affected alimony payments by no longer requiring the recipients to include the alimony received in taxable income.

The tax savings from being able to deduct alimony payments can be substantial, as the previously allowed alimony deduction was what the accounting world refers to as an “above-the-line” deduction – reducing your taxable income on a dollar for dollar basis.

Similarly, the tax savings from not being required to report alimony payments in income, for all alimony payments required by post-2018 divorce agreements, is equally as significant for the former spouse receiving the payments.

The parties and their attorneys may have to rethink their “old” calculations and come up with a new plan moving forward in order to come to “new” workable settlement agreements.

Due to the significant economic effect of the change in the tax treatment of alimony after December 31, 2018, if you are in the midst of a divorce proceeding, the date of execution of the divorce agreement may be critical.

Your FOS family law attorney can help guide you through the new law and its effect on you.