New Tax Law Changes & Alimony Payments to Nonresident Aliens
Source: Angloinfo Global
weeping tax reform was signed into law by President Trump on December 22, 2017. If you’re in the middle of a divorce or separation agreement, and you will be the spouse receiving alimony, it may be worth your while to delay matters and ink the deal after January 1, 2019 when the new tax law regarding alimony takes effect. On the other hand, if you will be the paying spouse, you’ll likely want to wrap things up before that date. Here’s why –
A payment of cash from one spouse to the other under the terms of a divorce or separation agreement, regardless of how it may be labeled in that agreement, will be characterized for US income tax purposes as “alimony” if the payment meets certain criteria. Current law looks to the criteria listed in Internal Revenue Code Section 71(a), the new law looks to the criteria listed in the new law itself that will become part of Internal Revenue Code Section 152(d)(5), as amended. Under current law, if treated as “alimony,” the payment will be tax deductible for the payor, and will be taxable income to the payee. The anticipated tax law changes these results as of January 1, 2019 making the alimony both non-deductible and non-taxable.
Parties wishing to utilize the new rules can modify their old divorce agreements. The parties’ situation should be reviewed to see if it is tax advantageous to use the new rules. Yes! This can certainly be the case. Here’s an example – assume a US resident payor (non-US citizen) departs the US losing US residency. Payment of alimony to a US recipient will be taxable income to the recipient, but the non-US payor may no longer care about any US tax deductions. Such a couple may benefit from the new rules and might look into modifying their current divorce agreement.