The Tax Cuts and Jobs Act of 2017, or TCJA, signed into law by President Trump on December 22, 2017, has taken tax policy concerning family support in divorce back to the first half of the last century. The TCJA reversed seventy-five years of tax treatment of alimony. Alimony is a cash support payment made periodically for a specific duration and usually from income earned by one former spouse paid to another as a result of dissolution of their marriage (divorce) or legal separation.
Since 1942 alimony has been included in the income of the former spouse receiving alimony under a judgment dissolving the marriage or a judgment of legal separation. In addition, the federal tax code provided that such payments were deducted from the income of the spouse paying alimony but taxable to the recipient. Prior to 1942, the guiding theory was that payment of support by one spouse to a former spouse was in satisfaction of a moral obligation arising out of the marriage contract. Alimony represented the commitment to support the family with a transfer of money from the higher income-earning spouse to the lower income-earning spouse with no income tax affect. The argument was made that the parties with financial resources in the marriage ought to continue to support the family despite the divorce without any tax advantage. That changed with the Revenue Act of 1942 when alimony became deductible to the payer and taxable for the recipient.
The TCJA now reverts to the pre-1942 view in which the transfer between former spouses in the nature of alimony is treated as if the marriage had remained intact. Effective January 1, 2019 all alimony paid under judgments dissolving marriages and judgments of legal separation entered on and after January 1, 2019 will not be deductible from the income of the payer nor included in the income of the recipient for federal and Connecticut tax purposes. The most apparent reason for this change is to include the funds used to pay alimony in the higher-earning spouse’s income which is likely to be subject to a higher tax rate and therefore generate greater tax revenue.
The TCJA also provides that if alimony is modified after January 1, 2019, the payments may continue to receive the same tax treatment as they did upon the entry of the original judgment, or the parties may opt in to the new tax provision so that the former spouse paying alimony will not deduct the money paid and the recipient will not include the alimony as income.
Since alimony became tax deductible, the U.S. Internal Revenue Service (with a bias to disfavor alimony since alimony removes income from the taxpayer who usually pays a higher rate than the recipient) has created a definition of “alimony” and related rules to insure that only the intended payment of support to a spouse could be deducted. Now that alimony will no longer be tax deductible for payments according to judgments entered in 2019 and beyond, the definition and rules are moot for such payments. This has a variety of consequences.
Alimony will no longer be a line item for taxable income on the U.S. tax form 1040 except to the extent the forms must still cover payments being deducted under judgments entered prior to 2019. This eliminates an easy resource that some have been known to use to confirm alimony income for prospective borrowers, renters, business partners and others. There will also no longer be an issue for the IRS to seek to “recapture” certain alimony payments and impose income tax on the theory that such payments were not made for support but were actually a transfer of assets. The IRS currently can recapture payments which are reduced by more than $15,000 in the third year of payments or reduced significantly in the second and third year from the amount paid in the first year. Alimony will also presumably no longer be required to be paid in cash unless a court’s judgment provides that it must. An asset with an agreed-upon value such as stock, bonds or a car could substitute for an alimony payment, depending on the language of the judgment. The rule that the two spouses may not live under the same roof for the payment of support to constitute alimony is eliminated. The requirement that alimony payments must stop on the death of the recipient is also eliminated.
The tax aspects of the payment of alimony have been a carefully considered factor in the determination of the amount of alimony to be paid in each case. Under current tax law, there is generally considered to be an advantage to the parties if the higher income earning spouse, who would typically pay alimony, deducts the alimony from income thereby saving tax and potentially reducing the applicable tax rate. A portion of such savings could be shared with the alimony recipient. For example, if the spouse paying alimony is earning $350,000 that spouse is in the 35% federal tax bracket (for 2018). If the amount of alimony paid is $100,000, under current law that spouse will pay $35,000 less income tax with the alimony deduction. That spouse’s adjusted gross income of $250,000 would then be in the 24% federal tax bracket so that spouse would pay 11% less in tax on the balance of the federally taxable income. However, under the TCJA, there will be no such adjustment to the income tax obligation beginning in 2019.
Also, the payee spouse is often at a lower tax rate so that such spouse could receive less cash and end up with the same amount of cash after taxes. Receiving more alimony might have put the recipient into a higher tax bracket so the benefit of the higher payment might be lost.
The determination of the amount of alimony to be paid is often a contentious and life-altering aspect of divorce. These issues of deduction for the spouse paying alimony and inclusion in income of the recipient have required close scrutiny and compromise. The goal is often to try to maximize the benefit to both parties while providing an affordable order that helps maintain the standard of living of both parties.
There is also an impact on Connecticut income tax payers in 2019. Since Connecticut bases its income tax on the federal adjusted gross income which will then no longer include alimony received and will not deduct from income alimony paid, Connecticut too will not provide for a deduction for alimony paid from income nor include alimony received as income.
There is no change to the fact that child support payments are not deductible for a parent paying such support nor included in the income of the receiving parent. Now the difference between alimony and child support will simply be the purpose and duration of the payments. In Connecticut, the child support obligation generally applies until the child attains the age of majority (18) or graduates from high school, whichever is later though not beyond age 19. The amount of child support is set by reference to the state’s Child Support Guidelines. The amount and duration of alimony remains an issue for resolution between the parties or the Court as there is no definitive law making that determination in Connecticut.
The TCJA has provided an incentive for the spouse likely to pay alimony to want a judgment entered in 2018 so that it will be tax deductible in future years. The recipient spouse may well have some incentive to delay any judgment until 2019 so that the alimony is not taxable in future years. Negotiations or resolution by a court will be required to arrive at a fair result for both parties.