As has been widely reported, Congress has repealed I.R.C. §§ 71 and 215, thereby eliminating the federal tax reduction for alimony. In addition, Congress has repealed former I.R.C. § 61(a)(8), which expressly defined alimony as taxable income.
In tax years governed by the new law, alimony will be taxable income to the payor, and will not be taxable income to the payee.
The effective date of the change is as follows:
(c) EFFECTIVE DATE. The amendments made by this section shall apply to
(1) any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 2018, and
(2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.
Pub. L. No. 115-97, § 11051, 131 Stat. 2054.
Thus, the new law will apply to all divorce or separation instruments executed after December 31, 2018. Divorce or separation instruments executed before December 31, 2018 will continue to be governed by former law, so alimony under those instruments will still be income to the payee and generate a tax deduction for the payor. Since many instruments will continue to be governed by prior law, the alimony deduction has not been repealed all at once but, rather, will die out slowly over a period of many years.
As an exception, if an instrument executed before December 31, 2018 is modified after December 31, 2018, the new law applies if the modification expressly so provides. Id. If an instrument governed by former law is modified, and the modified instrument is silent or states an intention to apply former law, former law will continue to apply.
It is easy to make an argument that whatever one might think of tax reform generally, a clear policy basis existed for repeal of the alimony deduction. The key issue in defining alimony for federal tax purposes is almost always whether the obligation would terminate upon the hypothetical death of the payee immediately after the obligation was created, before payment was made. In essentially all of the above cases, the taxpayer made extremely weak arguments that attempted to avoid the plain meaning of the test. As a practical matter, the alimony deduction tended to encourage frivolous arguments. The deduction also required federal courts to dive deeply into the substance of domestic relations law, including the domestic relations law of foreign countries, as in Wolens. The administrative cost of recognizing the deduction was significant.
It is hard to see what countervailing benefit justifies the cost. The deduction shifted taxable income away from higher-income supporting spouses and therefore reduced overall tax revenue. The beneficiaries of the deduction were alimony payors, many of significant wealth. (The wealth of the payors is probably one factor in explaining why so many cases have involved frivolous arguments for applying the deduction; the payors could afford to make weak arguments with only a limited chance for success.) In effect, the federal government was bearing part of burden of supporting alimony recipients. It was not unreasonable for Congress to decide that the deduction was not worth keeping.
Applying the repeal prospectively only makes good sense, as many divorce settlements were made in express reliance upon the previously settled federal tax treatment of alimony. Preserving existing bargains, made in reliance upon settled law, is a benefit that justifies the cost of the deduction. Prospectively, however, there is a good argument to made for repeal of the deduction.