Question

Fred and Wilma divorced in 2016 and have lived apart ever since. Their 2016 divorce agreement, which has not been modified since agreed to, specifies that Fred will pay Wilma $50,000 in cash each year. The agreement states that $15,000 relates to "child support" for their daughter Pebbles. The remaining $35,000 is labeled as "alimony" in the agreement. Of the amount labeled as "alimony", the agreement specifies that $25,000 of it will terminate upon the death or remarriage of Wilma. The other $10,000 will terminate upon either of those events or upon Pebbles reaching age 18 if earlier. How much of the $50,000 is eligible to be treated as pre-2019 alimony for tax purposes (for-AGI deduction for Fred and gross income for Wilma)? Explain.

Answer 1

Prior to the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, alimony payments were eligible for tax deductions by the paying spouse and were considered taxable income for the receiving spouse. However, the TCJA made significant changes to the tax treatment of alimony.

For divorce or separation agreements executed or modified after December 31, 2018, alimony payments are no longer deductible by the paying spouse, and the recipient spouse does not need to report the payments as taxable income. This change applies to agreements executed or modified after 2018, regardless of when the divorce or separation occurred.

In the given scenario, Fred and Wilma divorced in 2016, which means their divorce agreement predates the TCJA and the changes in the tax treatment of alimony. Therefore, the $35,000 labeled as "alimony" in their 2016 divorce agreement would be eligible to be treated as pre-2019 alimony for tax purposes.

To be clear, $35,000 of the $50,000 Fred pays to Wilma each year would be considered pre-2019 alimony and would be deductible for Fred (for-AGI deduction) and taxable income for Wilma. The remaining $15,000 labeled as "child support" is not eligible for any tax treatment and is not affected by the changes brought by the TCJA.