Alimony After the TCJA
Erase the pre-2018 rules from memory. For any divorce or separation agreement executed after December 31, 2018, the Tax Cuts and Jobs Act eliminated the alimony deduction. Alimony — also called spousal support or maintenance — is no longer deductible by the payer and no longer taxable income to the recipient (the Act repealed the IRC §215, “Alimony, etc., payments” deduction and the IRC §71, “Alimony and separate maintenance payments” inclusion).
This is not a bookkeeping detail. The higher earner now pays support with after-tax dollars at their top marginal rate, while the recipient takes it tax-free. The old regime shifted income down to the lower bracket and let the government effectively subsidize part of the payment; that subsidy is gone. A $60,000 annual obligation that once cost a 37%-bracket payer roughly $38,000 after the deduction now costs the full $60,000. As a tax-planning tool, alimony is dead.
That asymmetry must be priced into the negotiation instead of absorbed blindly by whoever signs the check. The gross-up rule is simple: a desired net support payment of to the recipient costs the payer in pre-tax income, where is the payer’s marginal rate. A $100,000-per-year support demand from a recipient is, viewed across the table, a demand for $100,000 / (1 - 0.37) $158,730 of pre-tax salary, partnership draw, or trust distribution from a top-bracket payer. Equivalently, every $100 of net support requires a $159 slice of the payer’s gross income. Use that ratio when trading support against an asset transfer: a one-time transfer of taxable cash or appreciated stock has its own embedded tax cost, but it is usually cheaper, per dollar delivered to the recipient, than a multi-year stream of after-tax support.
Four nuances survive. Agreements executed on or before December 31, 2018 are grandfathered under the old deductible-and-taxable rules, and they stay that way even when later modified — unless the modification expressly adopts the new treatment. Those grandfathered agreements still carry the front-loading recapture trap of IRC §71(f), which claws deductions back into income if payments drop too sharply in the second or third post-separation year, so a payer disguising a property settlement as deductible support gets caught on a three-year lag. Child support was never deductible and never taxable; do not conflate the two, because when one person owes both, how the decree characterizes each dollar changes the after-tax math considerably. And a quiet casualty of the repeal: the same Act struck the sentence in IRC §219(f)(1), “Retirement savings” that had counted taxable alimony as compensation for IRA purposes, so post-2018 support is not compensation and a non-working recipient cannot fund an IRA with it. (Support under a grandfathered pre-2019 instrument, still includible in income, still counts.) A spousal IRA funded off the working spouse’s earnings during the marriage is therefore something to negotiate before the decree, not after.
The property division itself is not a gift and not a sale. IRC §1041 makes any transfer between spouses, or between former spouses incident to divorce, a non-recognition event: no gain, no loss, and the recipient takes the transferor’s carryover basis. That last clause is the one that gets negotiated badly. A $2 million brokerage account with a $400,000 basis and a $2 million house with a $1.9 million basis are not the same $2 million; the first carries roughly $1.6 million of latent gain and, for a California resident at 20% federal plus 3.8% NIIT plus 13.3% state, about $593,000 of embedded tax. Value every asset after tax before you trade it. On the transfer-tax side, IRC §2516, “Certain property settlements” treats transfers made under a written agreement, where the divorce becomes final within the window running from one year before to two years after the agreement, as made for full and adequate consideration — so no gift tax and no exemption consumed. Miss that window and an unequal division can be recharacterized as a taxable gift. One boundary worth knowing: IRC §1041 does not apply where the recipient spouse is a nonresident alien, so a cross-border split is a taxable disposition and needs its own analysis.
Secure the Obligation, or You Have Bought a Promise A support order is worth exactly as much as the payer’s continued existence and solvency, and it generally dies with them. So write the security into the decree instead of trusting to it: require the payer to maintain life insurance in an amount that declines with the remaining obligation, with the recipient as both owner and beneficiary — not merely as beneficiary of a policy the payer owns, because an owner can change the beneficiary form the week after the judgment and the proceeds would otherwise sit in the payer’s estate (section “Titling and Beneficiary Designations”). Add a clause requiring annual proof that premiums have been paid, name a remedy if they have not, and buy the coverage before the decree is signed while the payer still has a reason to cooperate with an underwriter. Disability coverage on the payer deserves the same treatment: support obligations survive a disability that ends the income funding them.