Alimony

[Christian]

A client has been involved in an ongoing divorce for some three plus years. Back in 2015 the judge decreed that he pay his wife spousal support (alimony) which will now continue after the final divorce decree until the end of 2027. The final decree will become effective on January 4, 2019. The client has agreed to file as married filing joint through 2018. The question is whether the alimony payments going forward are taxable or non-taxable income. Does the date of the initial decree determine this or the date of the final decree in 2019. I am thinking it is the final decree but I could be incorrect. Any input is appreciated. 

[Christian]

Well maybe not. Since the alimony was part of a bill of separation prior to 2019 he may be able to use that as his basis to continue deducting the alimony payments. What do y'all think?

[Lee B]

"TCJA changes alimony tax treatment only for alimony orders pursuant to an instrument of divorce entered after December 31, 2018.  Couples planning to divorce may want to hasten their proceedings — or at least their drafting and signing of divorce instruments to take advantage of pre-TCJA alimony tax treatment.  An instrument of divorce must specify periodic payments and the parties must reside in separate households.  Experts believe an instrument signed before December 31, 2018, will qualify for pre-TCJA tax treatment, even if the divorce is not yet final.  If the parties sign their divorce instrument before the end of this year, they can also agree to pre-TCJA tax treatment for any subsequent modification of their alimony arrangement.  In that way, couples who sign an alimony instrument of divorce before December 31, 2018, can preserve the deductibility of alimony far into the future."

[Evan S. Golar]

Effective 2019. Alimony is no longer deductible by the payor spouse and includible in income by the recipient spouse. This rule only applies for divorce or separation instruments executed after December 31, 2018, and instruments executed on or before December 31, 2018, but modified after that date to include these new provisions.

[Richcpaman]

There is a reason why the opposing party wants to go final on January 4, 2019, instead of November or December 2018..  So the Alimony is NOT deductible. 

[Lynn EA USTCP in Louisiana]

As of 1/1/2019 alimony is not deductible by the payor and not included in taxable income by the payee.

 

[jklcpa]

I would say that both documents should be reviewed for their wording and intent.  First look at the separation agreement to determine if that alimony was open-ended or if it says that it will be redetermined when the final divorce decree is signed.  Then also look at the final divorce decree to see if it references continuation of the earlier agreement without change, if indicates that that earlier agreement will remain in effect, or if there is some sort of modification that will use the new provisions of the TCJA. 

Quoting from a topic ~ 2 mos ago:
 

Quote

Concerning the changes pertaining to alimony -

• The new law will NOT affect those already paying or receiving alimony under existing agreements.
• The new rules generally apply to divorce and separation agreements executed after December 31, 2018 and prior agreements modified on January 1, 2019 and thereafter IF those modifications expressly state that the new rules apply to those modifications.

Below is the actual text from the relevant section of the Act itself:

 

Sec 11051 (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.

 

Edited November 6, 2018 by jklcpa
formatting only- reduce size of text

[Christian]

In reviewing the replies and looking over the highlighted items as well I come away with the thought that IF the parties have drawn up the divorce settlement as the client tells me they have ("We have already agreed to everything.") and signed it he will likely be able to continue deducting the alimony EVEN THOUGH the decree itself falls on January 4th of 2019 as is noted above " Experts believe an instrument signed before December 31, 2018, will qualify for pre-TCJA tax treatment, even if the divorce is not yet final". In the end I suspect his attorney has been outfoxed by her attorney and that the final settlement document has not been signed nor will be until after January 4th. 

[Terry D EA]

On ‎11‎/‎6‎/‎2018 at 4:40 PM, Christian said:

In reviewing the replies and looking over the highlighted items as well I come away with the thought that IF the parties have drawn up the divorce settlement as the client tells me they have ("We have already agreed to everything.") and signed it he will likely be able to continue deducting the alimony EVEN THOUGH the decree itself falls on January 4th of 2019 as is noted above " Experts believe an instrument signed before December 31, 2018, will qualify for pre-TCJA tax treatment, even if the divorce is not yet final". In the end I suspect his attorney has been outfoxed by her attorney and that the final settlement document has not been signed nor will be until after January 4th. 

I agree on the attorney being out foxed here. I believe the opposing party attorney knows the new rules and signing after 12/31 means the opposing spouse or payee does not have to include the amounts as taxable income either.

[SaraEA]

There is still time for your client to approach the lawyer and say if the agreement is not signed in time, alimony will be reduced by whatever tax bracket applies because it will not longer be deductible.  Spouse may even come out ahead if her bracket would have been higher if the alimony was declared as income so she gets to keep more of the reduced amount.  Win-win?

[Christian]

I must be missing something here. Under the new law the former wife will receive the same alimony amount even though her former husband is now paying tax on it. It is not reduced by the taxes he is paying and looks to be a win situation for her.

[Abby Normal]

On 11/10/2018 at 5:34 PM, Christian said:

I must be missing something here. Under the new law the former wife will receive the same alimony amount even though her former husband is now paying tax on it. It is not reduced by the taxes he is paying and looks to be a win situation for her.

It's only for new or modified divorce agreements after 12/31/18 and the fact the recipient is getting it tax free should be factored into the payment amount.

[Christian]

That is to say his attorney should raise this point. In view of the fact he was clueless about the change in the law leaves room for being pessimistic. I sent his attorney an email discussing the new law including the paragraph from Divorce Magazine and suggested he have further discussions with the firm's CPA. I wish them luck since it apparently has been a contentious divorce.

[Possi]

On 11/6/2018 at 3:01 PM, jklcpa said:

I would say that both documents should be reviewed for their wording and intent.  First look at the separation agreement to determine if that alimony was open-ended or if it says that it will be redetermined when the final divorce decree is signed.  Then also look at the final divorce decree to see if it references continuation of the earlier agreement without change, if indicates that that earlier agreement will remain in effect, or if there is some sort of modification that will use the new provisions of the TCJA. 

Quoting from a topic ~ 2 mos ago:
 

 

The alimony began with the separation in 2018. I'll get the documentation and see if there were any changes or if the separation agreement carried on as the divorce decree. Thanks so much!