Until December 31, 2018, alimony is deductible by the payor and includable in the gross income of the payee. I.R.C. §§ 215 and 71. As the income of the payee is typically less than that of the payor, the payee’s tax rate is likely to be lower. Thus, where one spouse is a high-earner, income can be shifted to the payee and the overall tax liability of the former spouses can be reduced through the alimony deduction. There are various criteria that qualify payments as “alimony” including but not limited to their being in cash; made pursuant to a written agreement or court order; and terminating on the death of the payee.
For all divorce or separation agreements executed after December 31, 2018, alimony will no longer be deductible by the payor. Instead, the taxes associated with alimony payments will be payable by the payor. The foregoing change may cause the amount of alimony, which would have been offered historically in any given case, to decrease in order to account for the increased tax burden. Thus, the standard of living to which the payee has become accustomed during marriage may be that much more difficult to sustain post-divorce. Divorcing spouses – including high-earners – often find it difficult to establish two households and maintain the marital standard of living, particularly in those relationships where one spouse is wholly financially dependent on the other. The changes in the tax law may exacerbate the problem and have long-term, negative consequences for the dependent spouse.