Tax Reform’s Impact on Alimony and Child Support
March 11, 2019
By Hubert Klein and John O’Grady
There is much confusion on whether alimony and child support are deductible under the 2017 Tax Cuts and Jobs Act (“TCJA”). One of the law’s changes is the elimination of the deduction of alimony payments as of January 1, 2019. (Since 1944, most alimony payments were deductible by the payor and payments received were taxable of income the recipient.) The TCJA changes are expected to impact how child support is calculated.
In order to qualify as alimony, the IRS requires the following:
- The spouses do not file jointly.
- Payments are in cash (including checks and money orders).
- Payments to a spouse or former spouse are under a divorce or separation agreement.
- The divorce or separation agreement does not designate the payment as not alimony.
- Spouses aren’t members of the same household at the time of payment. This applies to legally separated spouses under a decree of divorce or of separate maintenance.
- There’s no liability to make the payment in cash or property after the death of the recipient spouse.
- The payment isn’t child support or other property settlement.
If a divorce is finalized after January 1, 2019, the alimony payments are no longer deductible and, therefore, no longer have to be declared as income by the recipient. This increases the payor’s taxable income and, subsequently, their federal income tax liability. Concurrently, the alimony recipient is no longer required to claim the support as income, which reduces his/her federal income tax liability. Given the new non-deductibility nature of the payments, tax reform is expected to result in lower alimony payment amounts.
We may see situations where ex-spouses choose to modify an earlier divorce agreement and adopt the new rule that went into effect in 2019. However, both former spouses must agree to any modification of an earlier divorce agreement. One spouse cannot make a unilateral decision.
An unclear element is how the TCJA will impact divorces filed on or after January 1, 2019, that involve prenuptial (or postnuptial) agreements entered into prior to January 1, 2019.
Another area impacted by the TCJA is child support. Child support is largely determined by the incomes of the parties. Therefore, the non-taxability of alimony may result in changes to how child support is computed and awarded post-December 31, 2018.
Legally-mandated child-support payments have no tax consequences for either the payor or the recipient, and they are not required to report child support on their tax returns. However, because most states look at after-tax income when determining child support, there may be some modifications on how that support is calculated.
With that said, the TCJA impacts calculations of child support in other ways. For example, many state child support guidelines take into account various, perhaps less-obvious aspects of federal income tax (several of which have changed):
- The child tax credit (modified by the TCJA).
- The value of a child’s personal exemption (abolished by the TCJA).
- The value of the standard deduction (increased by the TCJA).
- The parent’s income tax bracket and filing status.
Therefore, while there are no income tax implications to the payor or recipient for child support, there can be implications on the amount to be paid or received as a result of the tax law changes. As always, consult with your legal and tax advisor for guidance on these topics.
And be sure to check out our companion article on “Tax Reform’s Impact on the Filing Status of Divorcing Couples.”