My readers know that broad US tax reform was enacted in December 2017 pursuant to the Tax Cuts and Jobs Act (“TCJA”). As of January 1, 2019, the TCJA’s new tax rules impacted any US spouse who was either paying or receiving alimony under a divorce or separation agreement executed after December 31, 2018.
Under TCJA’s rules, alimony will not be deductible, nor taxable, under agreements signed beginning on January 1, 2019. With respect to agreements signed prior to January 1, 2019, these remain “as is”. Alimony paid pursuant these “old” agreements is taxable under the prior rules (that is, alimony is deductible by the paying spouse and taxable to the recipient spouse) unless the parties modify the agreement on or after January 1, 2019, by specifically referencing the new law and stating the agreement is modified by the new law.
My blog post here provides all the detail about the taxation of alimony, including an explanation about the withholding duties imposed on the US spouse paying alimony to a nonresident alien individual (NRA) under an agreement governed by the old law.
IRS Publication 5307
The Internal Revenue Service (IRS) had provided information to taxpayers about the new rules for alimony on page 10 of IRS Publication 5307. As one can see, the information is very unclear (are we surprised?) and I can just imagine taxpayers’ confusion. I can just see a taxpayer whose divorce agreement was modified after December 31, 2018 not including alimony payments in income on the 2019 tax return based on the IRS Publication, which reads as below:
“Repeal of deduction for alimony payments
Alimony and separate maintenance payments are no longer deductible for any divorce or separation agreement executed after December 31, 2018, or for any divorce or separation agreement executed on or before December 31, 2018, and modified after that date. Further, alimony and separate maintenance payments are no longer included in income based on these dates, so you won’t need to report these payments on your tax return if the payments are based on a divorce or separation agreement executed or modified after December 31, 2018.”
Let’s Clarify That…..
Apparently (and thankfully), someone at the IRS must have noticed that this would generate confusion. Over the summer the IRS issued a clarification about the repeal of deduction for alimony payments under the TCJA. Here’s the clarification:
“Alimony or separation payments paid to a spouse or former spouse under a divorce or separation agreement, such as a divorce decree, a separate maintenance decree, or a written separation agreement, may be alimony for federal tax purposes. Alimony or separation payments are deductible if the taxpayer is the payer spouse. Receiving spouses must include the alimony or separation payments in their income.
Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after Dec. 31, 2018.
This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, as long as the modification:
- changes the terms of the alimony or separate maintenance payments; and
- states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
On the other hand, generally alimony or separate maintenance payments are deductible from the income of the payer spouse and includable in the income of the receiving spouse, if made under a divorce or separation agreement executed on or before Dec. 31, 2018, even if the agreement was modified after December 31, 2018, so long as the modification is not one described in the preceding paragraph.”
In a Nutshell
If, after December 31, 2018, you have modified (or will modify) a divorce or separation agreement that was signed ON or BEFORE Dec. 31, 2018 the alimony paid is still deductible by the paying spouse, and still included in the income of the recipient spouse UNLESS that modification does 2 things: First, the modification must change the terms of the alimony or separate maintenance payments (so, if it changes child custody or visitation rights, this is not relevant for the tax inquiry); and second, the modification must provide that the alimony or separate maintenance payments are not deductible by the paying spouse or includable in the income of the receiving spouse. In other words, the language should expressly state that the repeal of the deduction for alimony payments applies to the instrument’s modification.
Don’t Forget Withholding Duties
If the payments of alimony to a NRA are taxable under the rules outlined above, they will be subject to gross withholding at source if the alimony is derived from “US sources”. Remember, the alimony has to be taxable under the rules above before one needs to worry about US tax reporting and withholding duties.
Understanding the withholding obligations is significant because if the US spouse paying the alimony must meet withholding duties and neglects them, the paying spouse can become personally liable for the tax. Payments of US-source income (such as alimony payments that are considered to have a US source) are also subject to reporting requirements. The spouse paying the alimony should obtain a Form W8-BEN from the NRA recipient. Part I of the Form contains a certification that the recipient is a NRA and Part II will cover the right to claim treaty benefits, that can reduce or eliminate withholding, if any such treaty benefits exist. The Form W8-BEN is retained by the paying spouse; it is not sent to the IRS. If the alimony is from US sources, withholding will be required by the paying spouse at the 30% (or lower treaty rate).
“Source” of Alimony Income
The source of alimony income is the residence of the paying spouse and not the location of the court that issued the divorce decree (e.g., a US or foreign court). This was made clear in the case of Elinor Manning versus the Commissioner. Thus, if the paying spouse is a US resident (regardless of his or her citizenship), the alimony will be treated as having a “US source”. If the amounts are taxable under the rules above, then reporting and withholding obligations must be met when paying the NRA recipient. On the other hand, if the paying spouse is resident overseas (even if a US citizen), then the alimony will not have a “US source” and it should not be taxable in the hands of the NRA recipient. Reporting and withholding should not be required on the part of the paying spouse, regardless of whether the new TCJA law is in effect.
Posted October 31, 2019
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