Adios Alimony Tax Ramifications

December 28, 2018
Holly S. Filius

With the implementation of the changes to the Federal Tax Code proffered by the Trump Administration, alimony payments post-December 31, 2018 will look a little different. Actually, a lot of different. In fact, the tax ramifications are gone.

Pre-December 31, 2018, alimony payments were taxable income to the recipient and deductible by the Payor. These tax ramifications were often vital tools in negotiating settlements in divorce matters where tax consequences were important to the parties and could be used as leverage in negotiation. While parties were free to agree to something other than alimony payments being taxable income to the recipient and deductible by the Payor, court ordered alimony awards were taxable income to the recipient and deductible by the Payor.

Post-December 31, 2018, alimony will be treated like child support, i.e. a non-taxable event. A party receiving alimony is no longer required to report that alimony as income and the Payor of alimony no longer receives the benefit of a tax deduction from their gross income. While parties have lost the specific ability to claim an alimony deduction and recipients benefit from the lack of taxability of their alimony payments, parties in private situations can still consider the tax effects of alimony payments in negotiation. When advocating for the Payor of alimony, how that alimony payment reduces the Payor’s income available for expenses should be considered regardless of the lack of deductibility. Similarly, the recipient of alimony’s increase in income available to meet his or her expenses must be considered. These considerations, while not technically includable or deductible on a tax return, are still considerations that the parties and attorneys should review when evaluating each party’s respective financial positions and as a result, an appropriate equitable distribution based on their financial circumstances at the time of division.

It is likely that there will be fewer alimony agreements given the lack of actual taxability and deductibility of those payments. However, the tax effect of any potential alimony award should be considered regardless of the fact that the alimony is no longer taxable or deductible. Alimony awards by Courts, as well as private alimony agreements, if made prior to December 31, 2018 remain deductible by the Payor and taxable to the Payee.

When considering a total overall settlement of a marital estate, alimony is a secondary remedy and an analysis of the equitable distribution to be received by each party is the primary economic concern. Thereafter, alimony should be considered if a party is unable to meet their reasonable needs, there is a significant difference in the parties’ incomes; one of the parties has a superior ability to obtain future capital assets, along with other financial considerations. Before entering into a final financial agreement in a divorce matter, spouses should consult with an experienced family law attorney to understand their rights and obligations with regard to equitable distribution, support, and alimony.

Holly Filius is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, Pennsylvania. She received her law degree from Widener University School of Law and practices in a variety of areas, including Family Law.