Federal Income Tax Issues Regarding Alimony
Kay Polk, Attorney at Law
Starting this year, important reforms under the recently enacted Tax Cuts and Jobs Act (TCJA) went into effect. Among the several reforms was a change to the tax treatment of alimony payments for federal income tax purposes. The TCJA’s changes to the alimony tax deduction represent a drastic departure from the historical treatment of alimony as tax-deductible for the payor spouse.
Pre-Tax Cuts and Jobs Act Tax Treatment
For a long time up until the reforms of the TCJA were enacted, the taxpayer who was responsible for paying alimony was allowed a deduction of those payments on their federal income tax returns. The rationale behind recognizing such a deduction was to assign tax liability to the spouse who benefited from alimony. The spouse who was obligated to pay alimony does not have the opportunity to benefit from it. As a result, the old rules treated the payor spouse as a conduit through which income flowed to the receiving spouse. However, this changed when the TCJA passed in 2017.
Alimony Tax Treatment Under the Tax Cuts and Jobs Act
Under the TCJA, the spouse who pays alimony could no longer deduct those payments on their federal income tax return. As a result, the payor spouse is responsible for paying federal income taxes on the amounts they paid in alimony. In contrast, the spouse who receives alimony does not have to report alimony payments as income for federal income tax purposes. Essentially, the TCJA shifts the deduction from the payor spouse to the receiving spouse.
However, the TCJA does not apply to alimony obligations that were ordered before January 1, 2019. Thus, if you got a divorce before January 1, 2019, the spouse responsible for paying alimony can still deduct those payments on their federal income taxes. The spouse receiving alimony must claim it as income on their tax returns. Simply put, divorce orders made before 2019 are still subject to the old rules regarding the deduction of alimony for tax purposes.
Be warned, even if your initial alimony obligation was ordered before January 1, 2019, orders issued on or after January 1, 2019 that modify an old alimony obligation will be subject to the new tax treatment under the TCJA reforms.
For example, if someone was ordered to pay alimony in a divorce that concluded in June of 2018, but received a reduction in their alimony obligation from the court on or after January 1, 2019, they can no longer deduct their alimony payments from their taxes. However, the receiving spouse can now deduct the alimony they received from their taxes for the year they started receiving the reduced alimony amount. As a result, an alimony modification reducing a spouse’s obligation might end up costing them more in taxes.
Texas Law on Alimony vs. Spousal Maintenance
Generally, Texas public policy prohibits courts from issuing and enforcing orders involving alimony and spousal support for an indefinite time. Texas courts have held that the duty to support one’s spouse terminates upon divorce. Instead, Texas law recognizes a spouse’s right to maintenance payments which are intended to help a financially disadvantaged spouse becoming self-supporting after divorce.
However, Texas law recognizes an individual’s right to enter into contracts. Accordingly, divorcees can enter into private agreements that create an obligation to pay spousal support or alimony. Courts will generally recognize the validity of such an agreement, but will abstain from enforcing alimony provisions as a court order. Instead, contractual alimony may be enforced as a contractual debt.
Therefore, in Texas, private parties can craft a provision in a settlement agreement that satisfies the federal definition of alimony so they can take advantage of the alimony tax deduction.
Contact Kay Polk, Attorney at Law
At the office of Kay Polk, Attorney at Law, you can count on Attorney Polk to stay current on recent legal developments that might affect your legal rights. If you need legal advice about a family law matter in Texas, you should consult a skilled lawyer like Kay Polk, Attorney at Law.
To schedule an initial consultation about your case, call Kay Polk, Attorney at Law at (713) 234-6260 or contact her online today.