The last month of this year will be an interesting time to be practicing family law, due to the elimination of the alimony deduction for post-2018 divorces. Most, if not all, of the family lawyers that I work with on a regular basis in divorce cases have been particularly interested in whether the new tax law will apply to modifications of alimony that occur on or after January 1, 2019 for spouses that have separation agreements signed before the end of December 2018.
The deduction for alimony payments was among the many tax deductions that Congress eliminated from the federal tax code on December 22, 2017 when the Tax Cuts and Jobs Act (TCJA) was signed into law. On the flip side of this provision, recipients of alimony payments will no longer be required to include such alimony payments as taxable income on their tax return. Practically speaking, it may appear that recipients of alimony were the winner of this change; however, in many cases, both parties could be negatively impacted, as this will change the game for negotiating the amount of alimony agreed upon amongst the spouses seeking divorce. The paying spouse may be less inclined to agree to a higher figure if they no longer have the ability to deduct against their income taxes.
Regardless of who the winner actually is or will be, the point of this blog is to inform family lawyers and taxpayers that the tax outcome of future modifications of alimony can only be answered if one can assume that the payments are properly classified as alimony under old tax law. This means the payments must be made under a written divorce or separation instrument and meet all of the following requirements under IRC Sec. 71(b):
- The payment must be in cash or cash equivalents.
- The payment is made to (or on behalf of) a spouse or former spouse.
- The payer’s obligation to make payments must be relieved upon the recipient’s death.
- The payer and the payee do not file a joint return with each other.
- For payments made after the divorce or legal separation is final, the payer and payee cannot be members of the same household at the time payments are made.
- The divorce or separation instrument does not state that the payment is not alimony for tax purposes.
- The payment cannot be explicit or disguised child support.
In the event that alimony payments agreed to under existing pre-2019 separation agreements are properly classified as alimony under Section 71(b), then the new tax law will not apply when those pre-2019 separation agreements are legally modified on or after January 1, 2019, unless the modification expressly provides that the repeal of the alimony deduction applies. Furthermore, in the event that the taxpayers want to apply the new tax law, each taxpayer must attach the modified agreement to each separately filed tax return, which will act as a nonalimony election under Section 71(b)(1)(B). Allow me to provide you with an example:
Nonalimony Election Under Section 71(b)(1)(B)
Payor spouse: John Doe
Payor spouse’s address: 555 Alimony Drive
Payor spouse’s SSN: 555-55-555
Payee spouse: Jane Doe
Payee spouse’s address: 555 TCJA Lane
Payee spouse’s SSN: 555-55-5555
John Doe and Jane Doe, the “parties,” hereby agree that, effective for calendar year 20XX and at all relevant times thereafter, payments made by John Doe to Jane Doe which would, absent this agreement, qualify as alimony or separate maintenance payments, will not be deductible by John Doe and will be excludible by Jane Doe. Reference is hereby made to the written separation agreement executed by the parties and dated XX/XX/20XX.
With only one month left in 2018, I welcome taxpayers and family law attorneys to continue to reach out to discuss the particulars of their case(s) as our litigation support team is here to assist in the areas of income taxation, forensic accounting, and business valuation among others. If you wish to seek such services, please feel free to reach out me at 240.364.2708.
 None of the qualifications listed in Section 71(b) have changed as a result of the TCJA being signed into law.