Alimony Taxation After the Tax Cuts and Jobs Act: Cross-Border Divorce Implications for Hong Kong Americans

The Tax Cuts and Jobs Act (TCJA) of 2017 fundamentally rewrote the US federal tax treatment of alimony and separate maintenance payments, a change that took full effect for divorce or separation instruments executed after December 31, 2018. For the estimated 60,000 to 80,000 US citizens and Green Card holders residing in Hong Kong, this shift created a permanent divergence between US tax law and the territorial source rules of Hong Kong’s Inland Revenue Ordinance (Cap. 112). The 2025-2026 tax season marks the first full cycle where post-TCJA alimony structures have been subject to IRS examination for six consecutive years, bringing heightened scrutiny to cross-border divorce settlements that involve Hong Kong-based assets, US-source retirement accounts, and dual tax residency claims. As the IRS continues its Large Business & International (LB&I) division’s campaign on high-income non-resident filers, the alimony deduction—or lack thereof—has become a critical audit trigger for Hong Kong Americans who may have inadvertently misapplied the old rules or failed to report alimony received under the new regime.

The TCJA’s Alimony Reversal: From Deduction to Inclusion

The Pre-2019 Regime and Its Cross-Border Mechanics

Before the TCJA, IRC § 215 allowed a payor spouse to deduct alimony or separate maintenance payments from gross income, while IRC § 71 required the recipient spouse to include those payments as gross income. This “assignment of income” principle operated regardless of the payor’s or recipient’s tax residence. For a US citizen living in Hong Kong, a Hong Kong divorce decree that ordered alimony payments from a Hong Kong bank account to a Hong Kong resident ex-spouse could still trigger US tax consequences if the payor remained a US person. The deduction was available on the US return (Form 1040, Schedule 1, line 18a), and the recipient reported the income on line 11 of Form 1040.

The key compliance trap under the old regime involved the Foreign Tax Credit (IRC § 901) and the Foreign Earned Income Exclusion (IRC § 911). An alimony deduction reduced the payor’s adjusted gross income (AGI), potentially increasing the amount of foreign earned income that could be excluded under the FEIE cap (USD 103,900 for 2018; USD 126,500 for 2024). However, the IRS consistently took the position that alimony payments were not “earned income” for FEIE purposes (Treas. Reg. § 1.911-3(b)(1)), meaning the deduction could not artificially inflate the exclusion. The US-Hong Kong Tax Information Exchange Agreement (TIEA), signed in 2014 and in force since 2016, has allowed the IRS to request Hong Kong bank records to verify alimony flows, making unreported alimony income a detectable issue.

Post-TCJA: The Repeal of Deduction and Inclusion

For any divorce or separation instrument executed after December 31, 2018, or for instruments modified after that date that explicitly elect to apply the new rules, IRC § 215(a) was repealed and IRC § 71(a) was amended to exclude alimony from the recipient’s gross income. The payor no longer receives a deduction; the recipient no reports the income. The Joint Committee on Taxation estimated this provision would raise USD 6.9 billion in federal revenue over ten years (JCX-67-17, December 2017), effectively shifting the tax burden from the recipient (often in a lower bracket) to the payor (often in a higher bracket).

For Hong Kong Americans, this change creates a peculiar asymmetry. Hong Kong’s Inland Revenue Ordinance imposes salaries tax on a territorial source basis (IRO § 8(1)). Alimony payments are generally not subject to Hong Kong tax because they are not “income arising in or derived from Hong Kong” from an employment, office, or pension. The Inland Revenue Department (IRD) has not historically treated alimony as assessable income. Thus, a Hong Kong resident recipient of US-source alimony may owe no Hong Kong tax on the payments, but under post-TCJA rules, the US payor receives no deduction. Conversely, if the payor is a Hong Kong resident and the recipient is a US resident, the payor’s US tax liability increases because the alimony is paid with after-tax dollars.

Cross-Border Divorce Structures: The Hong Kong Asset Matrix

Alimony Funded by Hong Kong Source Income

The most common scenario for Hong Kong Americans involves a payor who earns income through Hong Kong employment, a Hong Kong sole proprietorship, or a Hong Kong limited company. Under pre-TCJA rules, the payor could deduct alimony paid from Hong Kong bank accounts against US-source income, subject to the FEIE limitation. Post-TCJA, no deduction is available. This creates a permanent double-tax-like effect: the payor pays US tax on the Hong Kong earned income (after FEIE, if applicable) and then pays alimony from that after-tax income, receiving no US tax relief.

However, the US-Hong Kong Double Taxation Agreement does not exist. The US and Hong Kong have only a TIEA, not a comprehensive income tax treaty. This means the US does not recognize Hong Kong as a separate jurisdiction for treaty-based relief on alimony. The US-China Tax Treaty (Article 4) defines “resident of a Contracting State” to include Hong Kong residents only for limited purposes under the 1984 US-China agreement, but the 2006 Protocol and subsequent regulations (Treas. Reg. § 1.901-2) make clear that Hong Kong is not a treaty partner for most US tax purposes. Consequently, the alimony deduction question is governed solely by the IRC, with no treaty override.

Alimony Paid from US Retirement Accounts

A second critical structure involves alimony paid from a US retirement account, such as a 401(k) or IRA. Under IRC § 408(d)(6) and Treas. Reg. § 1.408-4(g), a transfer of an IRA incident to a divorce is not a taxable event if made under a divorce or separation instrument. However, this non-recognition treatment applies only to transfers between spouses or former spouses. If the alimony is paid directly from the IRA to the recipient as a periodic payment, it is treated as a distribution to the payor (IRC § 72(t)), potentially triggering the 10% early withdrawal penalty if the payor is under age 59½. Post-TCJA, the payor cannot deduct the alimony component, and the recipient reports no income from the alimony—but the IRA distribution itself is taxable to the payor.

For Hong Kong Americans, a US IRA distribution is generally US-source income under IRC § 861(a)(8) and not eligible for the FEIE, as it is not earned income. The Hong Kong IRD would not tax the distribution if the payor is a Hong Kong resident, because the source is outside Hong Kong (IRO § 8(1A)(b)(i)). This creates a US-only tax liability on the distribution, with no offsetting deduction. The 2024 IRS examination cycle has seen increased scrutiny of IRA-to-alimony conversions, particularly where the payor claims the distribution is a non-taxable transfer under IRC § 408(d)(6) but the payments continue post-divorce without a formal QDRO or divorce instrument amendment.

Property Settlements vs. Periodic Alimony

The TCJA did not change the treatment of property settlements under IRC § 1041. Transfers of property between spouses or former spouses incident to divorce remain non-recognition events. However, the distinction between a property settlement and periodic alimony has become more consequential post-TCJA. For Hong Kong Americans, the common practice of transferring Hong Kong real property or BVI company shares as part of a divorce settlement must be carefully documented to avoid recharacterization as alimony.

If a Hong Kong property transfer is treated as alimony by the IRS, the payor receives no deduction (post-TCJA), and the recipient reports no income. But the recipient’s basis in the property becomes the payor’s basis (IRC § 1041(b)(2)), which could be significantly lower than fair market value, creating a future Hong Kong property tax liability upon sale. The Inland Revenue Ordinance imposes profits tax on gains from the sale of Hong Kong property only if the transaction is considered a trade or business (IRO § 14(1)), but the Stamp Duty Ordinance (Cap. 117) applies to the transfer itself. A divorce-related transfer may qualify for stamp duty relief under the “transfer between spouses” exemption (SDO § 29), but this exemption does not apply to former spouses, meaning stamp duty at the full rate (up to 4.25% for residential property over HKD 20 million) could be triggered.

Reporting Obligations and the IRS Examination Cycle

Form 1040 and the Alimony Line Items

The IRS revised Form 1040 for 2019 to remove the alimony deduction and inclusion lines. For tax years 2019 onward, alimony paid is not deductible on line 18a (which now shows “Alimony paid – 0”), and alimony received is not reported as income. However, the IRS requires taxpayers to report alimony paid under pre-2019 instruments on line 18a, and alimony received on line 11. The 2024 Form 1040 instructions explicitly state: “Do not include alimony or separate maintenance payments you received under a divorce or separation instrument executed after 2018.”

For Hong Kong Americans who divorced after 2018 but continue to pay alimony under a pre-2019 instrument that was not modified, the old rules apply. An instrument is considered “executed” on the date the divorce decree is entered, not the date of the separation agreement. The IRS has clarified in Notice 2018-37 that a modification after 2018 that does not expressly state that the TCJA rules apply will continue to be governed by pre-TCJA law. This creates a trap for Hong Kong Americans who may assume that a Hong Kong court’s variation order after 2018 automatically triggers the new rules; it does not, unless the order explicitly references IRC § 71(c)(2)(C).

FBAR and FATCA: The Alimony Connection

Alimony payments flowing through Hong Kong bank accounts trigger FBAR (FinCEN Form 114) and FATCA (Form 8938) reporting obligations for the account owner. A US citizen payor who maintains a Hong Kong bank account from which alimony is paid must report the account on FBAR if the aggregate value exceeds USD 10,000 at any time during the calendar year. The alimony payments themselves are not separately reportable on FBAR, but the account balance is. For the recipient, if the alimony is deposited into a Hong Kong bank account, that account must also be reported if the recipient is a US person.

The 2024 IRS Large Business & International (LB&I) campaign on “High-Income Non-Filer with Foreign Assets” has specifically targeted taxpayers who report significant alimony deductions (for pre-2019 instruments) but fail to report foreign accounts. The IRS can now match FBAR filings with Form 1040 alimony lines through its Automated Underreporter (AUR) program, which was enhanced in 2023 to cross-reference foreign account data (IRS Data Book, 2023, Table 17). A Hong Kong American who deducts alimony on a pre-2019 instrument but does not file FBAR for the Hong Kong account from which the payments are made faces a potential penalty of USD 10,000 per account per year for non-willful violations (31 U.S.C. § 5321(a)(5)(B)(i)).

Statute of Limitations and the Offshore Voluntary Disclosure Program

The general statute of limitations for IRS assessment is three years from the filing date (IRC § 6501(a)). However, for taxpayers who fail to report foreign financial assets exceeding USD 5,000 on Form 8938, the statute extends to six years (IRC § 6501(e)(1)(A)). For alimony-related underreporting, the IRS can argue that the failure to report foreign accounts constitutes a “substantial omission” of gross income, triggering the six-year period. The 2024 IRS Offshore Voluntary Disclosure Program (OVDP) remains closed to new applicants since 2018, but the Streamlined Filing Compliance Procedures (SFCP) remain available for non-willful non-compliance. A Hong Kong American who failed to report alimony income under the old regime or misapplied the new rules may qualify for the SFCP if they can certify that the failure was non-willful.

Actionable Takeaways

1. Review your divorce or separation instrument’s execution date: if executed after December 31, 2018, the new IRC § 71 and § 215 rules apply, and no alimony deduction or inclusion is permitted on your US tax return.
2. If you pay alimony from a Hong Kong bank account, ensure your FBAR (FinCEN Form 114) and FATCA Form 8938 are filed annually with the correct aggregate account values, regardless of whether the alimony is deductible.
3. For pre-2019 instruments modified after 2018, confirm that the modification order explicitly elects TCJA treatment under IRC § 71(c)(2)(C); otherwise, the old rules continue to apply and the deduction remains available.
4. If alimony is paid from a US retirement account, obtain a Qualified Domestic Relations Order (QDRO) or ensure the transfer qualifies under IRC § 408(d)(6) to avoid the 10% early withdrawal penalty on the distribution.
5. For Hong Kong property transfers in divorce settlements, document the transaction as a property settlement under IRC § 1041 and verify whether Hong Kong stamp duty relief applies, as the former-spouse exemption is not automatic.

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This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.