Before the new tax law was passed by Congress and signed into law by the president on December 20, 2017, 26 U.S. Code Section 71(a) read “Gross income includes amounts received as alimony or separate maintenance payments” which mean that the alimony or spousal maintenance receiver was the person who paid taxes on the alimony or spousal maintenance.
This was distinguished from child support in 26 U. S. Code Section 71(c)(2) which read “Subsection (a) shall not apply to that part of any payment which the terms of the divorce or separation instrument fix (in terms of an amount of money or a part of the payment) as a sum which is payable for the support of children of the payor spouse.” Which meant that the child support was taxable to the spouse paying the child support.
Regarding the deductibility, 26 U.S. Code Section 216(a) read “In the case of an individual, there shall be allowed as a deduction an amount equal to the alimony or separate maintenance payments paid during such individual’s taxable year.”
So, in sum, under the old law, the alimony receiving spouse paid taxes on that spousal support and the person paying child support paid taxes on the child support. Vice Versa was also true. The person paying the alimony did not pay taxes on the spousal support and the person receiving the child support did not pay taxes on the child support they received.
The new law strikes all of that alimony law meaning that alimony payments are no longer deductible to the payor and nor longer taxable to the payee.
The new law includes the following language as to when and how this law will take effect:
“Effective Date.—The amendments made by this section shall apply to—
(1) any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 2018, and
(2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.”
So, we have one year to wait until this part of the law becomes effective on January 1, 2019.
Old divorce decrees entered before January 1, 2019 will still have the payee paying taxes and the payor taking the deduction.
Any modifications to those old divorce decrees in the future will only modify the responsibility for taxes if it is expressly provided for in the modification.
What does all this mean for someone getting divorced soon?
Well, if you’re going to be paying maintenance (or suspect you will be) you’ll want to close out your divorce before 2019. If you expect to receive maintenance, you’ll want to extend your divorce proceedings past 2019.
But, it’s my opinion that state legislatures across the nation will change their maintenance laws in the next year to try to accommodate this tax issue. You can always be sure that there are very wealthy people who are getting divorced or planning to get divorced and will be lobbying furiously to keep this windfall from their soon-to-be ex-spouses.
Update: The Illinois legislature has a pending bill to resolve this issue. Now, you may want to delay your divorce because maintenance will be based on net, not gross in 2019. More details to follow.
So, as always with divorce law, stay tuned for changes and hire a lawyer who makes it his or her business to stay apprised of changes in divorce law.
Contact my Chicago, Illinois office to learn more about how federal tax laws are changing Illinois divorce laws