Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), alimony had been deductible by the payor spouse and includible in the income of the recipient spouse. Often, the payor spouse is in a higher tax bracket than the recipient spouse. The tax arbitrage between the tax brackets left more money on the table for the spouses to work with.
Under TCJA, the deduction for alimony is permanently removed for divorce or settlement agreements executed after 12/31/18, or for existing agreements modified thereafter to expressly adopt this tax treatment. Similarly, alimony will no longer be includible in taxable income by the recipient.
New York has decoupled from federal on this provision. Alimony is still deductible by the payer and includible in income by the recipient.
Under the old law, taxable alimony received was treated as compensation for the purpose of qualifying for an IRA contribution. This will no longer be the case.
If you’re on the brink of finalizing a divorce or separation agreement, it might be beneficial to both parties to execute the agreement by 12/31/18. Be sure to consult your tax advisor.