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Author's Synopsis: In 2017 Congress repealed the provisions that allowed divorced or legally separated couples to shift the income tax burden of alimony payments from the payor spouse to the payee spouse. The stated purposes for the change were to simplify the tax code and to eliminate an unwarranted tax preference favoring divorced couples over married couples. On closer scrutiny, it appears that Congress may have been less interested in simplification or equity than in scoring revenue gains to offset the cost of unrelated tax cuts for high-income individuals, business owners, and corporations. In addition to reallocating the tax burden of direct alimony payments, the 2017 changes increase the likelihood that the grantor of a trust will remain taxable after divorce or legal separation on trust income distributed to a former spouse. In the absence of a statutory exception, the grantor trust rules will apply to the extent that trust income might be used to satisfy the grantor's continuing alimony obligation, no matter how contingent. Furthermore, even if the grantor has no continuing alimony obligation, any trust income distributable to the former spouse will be attributed to the grantor if the trust was created during marriage. Unfortunately, given the budget considerations that facilitated the 2017 changes, it will be politically difficult to alleviate their undesirable consequences. [ABSTRACT FROM AUTHOR]

The characterization and analysis of various payments from one divorcing spouse to the other are often crucial elements in the negotiation or adjudication of divorce actions. A frequently determinative factor is the tax treatment of these payments. It is critical that divorce practitioners carefully consider the tax effects of all transfers incident to divorce and that they be aware that the mere characterization of inter-spousal payments in a divorce instrument will not necessarily govern their treatment for tax purposes. It is not uncommon that a payment is labeled as "alimony" in a decree or marital settlement agreement but does not qualify as alimony under the Internal Revenue Code, or vice versa. For federal income tax purposes, a payment between spouses in connection with a marital dissolution must be either a payment of alimony, a payment of child support or made as part of a property settlement or transfer of assets of the marital estate. Each of these categories of inter-spousal payment will give rise to different tax considerations and results.