The Tax Blotter – 2021 Year-End Edition
The Tax Blotter is a round-up of recent tax topics. Due to recent federal tax legislation, the deduction for alimony payments is no longer available, but you may still deduct payments under certain older agreements.
Dec. 21, 2021
The Tax Blotter is a round-up of recent tax topics.
Due to recent federal tax legislation, the deduction for alimony payments is no longer available, but you may still deduct payments under certain older agreements.
Seek consent for alimony. Generally, payments for alimony were deductible by the payor prior to the Tax Cuts and Jobs Act (TCJA), while the corresponding amounts constituted taxable income to the recipient. But the TCJA repeals the deduction for divorce and separation agreements executed after 2018. Nevertheless, you can continue to deduct payments for pre-2019 agreements, even if they are modified after 2018. Caveat: Both parties must consent to this arrangement for modifications.
Negotiate divorce agreements. Most major changes for individuals included in the Tax Cuts and Jobs Act (TCJA) are temporary. For example, the TCJA suspends the rules for dependency exemptions, effective in 2018, but this provision is scheduled to “sunset” after 2025 unless Congress acts again. Key exception: The repeal of the alimony deduction, and corresponding income inclusion, is permanent. Consider the change a bargaining chip when working out an agreement with an ex-spouse.
Double-dip on health insurance. The tax treatment for alimony payments isn’t automatic. You must meet certain requirements to qualify for deductions. In a new case of first impression, a taxpayer paid for the cost of health and vision insurance for his spouse through his employer’s payroll deduction plan. Even though he benefitted from the tax exemption for health insurance payments, he still deducted the alimony. Tax windfall: The Tax Court approved the deduction because the taxpayer technically met all the requirements (Leyh, TC No. 7, 10/4/21).