In terms of tax treatment, how are alimony payments classified for agreements finalized after 2018?

For agreements finalized after 2018, alimony payments are classified as non-deductible for the payer and non-taxable for the recipient. This change is a result of the Tax Cuts and Jobs Act (TCJA) which revised the tax treatment of alimony. Prior to this legislation, alimony payments were typically deductible by the payer and taxable to the recipient, which provided a tax advantage to the payer.

Under the new rule, alimony does not generate a tax deduction for the payer, meaning that individuals who make these payments cannot reduce their taxable income by the amount of alimony paid. Simultaneously, the recipient of the alimony payments does not have to report this income, as they aren't taxed on it. This dual change means that neither party benefits from tax deductions or tax obligations related to alimony under agreements made after 2018, which simplifies tax reporting but may also affect negotiations in divorce agreements.

Understanding this change is crucial for clients involved in divorce proceedings or in the planning stages, as it impacts financial strategies and expected tax liabilities significantly.