What You Need to Know About Alimony Payments and Recent Tax Changes

Prior to the December 2017 Tax Cuts and Jobs Act (TCJA), when one spouse paid alimony (or separate maintenance payments) to the other spouse in a divorce, the paying spouse could deduct the alimony payments on his/her Federal income tax form.

At the same time, the spouse receiving the payment was required to report the alimony payment as income.  This arrangement tended to encourage larger alimony payments because the paying spouse typically was in a higher tax bracket and the spouse receiving the payment was in a lower tax bracket.

According to David Anderson, a Certified Valuation Analyst who has served for many years as a marital dissolution accountant in Philadelphia and the Delaware Valley, the TCJA potentially changes all of this.  Here’s how:

For Alimony Agreements currently in effect (as of the date of this blog posting): 

The TCJA won’t change the deductibility of alimony by the paying spouse and requirement for the spouse receiving the payment to report the alimony payment as income if the following requirements are met:

  • The alimony payment must be part of a written divorce or separation decree/agreement that is currently in effect;
  • The alimony payment must be made to the ex-spouse or on behalf of the ex-spouse;
  • The payment cannot be specifically stated in the written divorce or separation decree/agreement as not being alimony nor can the written divorce or separation decree/agreement state that the payment is not deductible by the paying spouse or not reportable as income by the spouse receiving the payment;
  • After the couple is considered divorced for Federal income tax purposes (divorced or legally separated), they cannot file a joint Federal income tax return and cannot live in the same household.
  • The alimony payment must be in cash or in a cash equivalent (the definition of cash equivalent for tax purposes could fill another blog);
  • The payment can not be stated in the written divorce or separation decree/agreement as being for child support.

Additionally, Anderson – whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley – said the paying spouse must list the receiving spouse’s social security number on his/her Federal income tax returns going forward, and, except for delinquent amounts, the written divorce or separation decree/agreement must not provide for ongoing payments after the receiving spouse dies.

For Alimony Agreements executed after the date of this blog up to and including through December 31, 2018: 

The TCJA won’t change the deductibility of alimony by the paying spouse and requirement for the spouse receiving the payment to report the alimony payment as income if the above requirements are met.

For Alimony Agreements executed after December 31, 2018: 

Under the TCJA, alimony will not be deductible by the paying spouse and will not be reportable as income by the spouse receiving the payment.

Based upon the above, Anderson – a divorce accountant and business valuation expert whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes marital dissolution and business valuation services in Philadelphia – strongly recommends the following:

Any divorced or legally separated couple currently under a written divorce or separation decree/agreement should check with their attorney(s) to make sure the paying spouse can continue to deduct the alimony payments (and that the spouse receiving the payment can continue to report the payment as income).

Additionally, Anderson said, any couple currently going through a divorce should work with an attorney(s) to complete execution of their written divorce or separation decree/agreement by December 31, 2018, if they want the paying spouse to be able to deduct the alimony payments (and the spouse receiving the payment to report the payment as income).

If you need a marital dissolution accountant in Philadelphia, or if you require any other services of a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.  Anderson also has served as a collaborative divorce accountant and marital dissolution accountant in Philadelphia and the Delaware Valley.

Click here to learn more about David Anderson & Associates.