Recently, Congress passed tax reform (known as the “Tax Cuts and Jobs Act”) which, in part, eliminated the alimony deduction for divorces entered after December 31, 2018. Alimony payments have historically been considered income to the recipient/payee and have been deductible by the payor if certain requirements are met (i.e., the payment must be in cash or by check/money order; the payment must be made under a divorce or separation instrument; the instrument must not designate the payment as being non-includable and/or non-deductible; the ex-spouses cannot be members of the same household; the payment cannot continue after the death of the recipient/payee; and the payment cannot be designated as child support). See I.R.S. Code §§ 61(a)(8); 62(a)(10); 71 & 215.
Since ex-spouses often have differing income levels, with the payor typically earning more and paying taxes at a higher rate, the deductibility of alimony often allows the ex-spouses to have a resulting, greater cash flow. In turn, this makes it easier for the ex-spouses to pay for the increased expenses associated with two households.
For divorces after December 31, 2018, alimony will no longer be deductible by the payor and will no longer be considered taxable income to the recipient/payee. But, for those divorced prior to that date, alimony will continue to be deductible (including subsequent modifications of alimony, unless expressly stated otherwise).
The elimination of the alimony deduction could encourage some to seek a divorce before the expiration date of December 31, 2018 (and some would say there is a certain irony that a decision by a Republican-led Congress, the party which has for years espoused “family values,” might actually end up promoting divorces). It will also likely make future divorce negotiations more contentious and complicated given the key role the deduction played in helping to maximize the available cash flow to ex-spouses. Finally, the elimination of the deduction raises conflicts with the statutory scheme for determining divorce-based support in Massachusetts. For example, the Alimony Reform Act, namely M.G.L. ch. 208 §53(b), suggests that, in part, a range of 30%-35% of the differences in the ex-spouses’ gross incomes is an appropriate amount of alimony. Although not specifically stated in the Reform Act, this range was based on historical, percentage levels of deductible alimony. Additionally, the recently revised Child Support Guidelines (2017) also seem to encourage the use of a higher amount of “unallocated support” (i.e., a combination of alimony and child support) which is considered deductible alimony instead of nondeductible child support. See Guidelines (2017), § II(A)(2) (relationship to alimony payments). See also Delong vs. Comm’r, T.C. Memo. 2013-70 (2013).
(Note, this blog represents the opinions of Sandy Durland, partner at Schmidt & Federico, P.C.)