Make Alimony Great Again…or Not?

The recent sweeping tax law, signed by President Donald Trump, known as the Tax Cuts and Jobs Act (TCJA), among other things disposed of the 75-year-old tax deduction for the payment of alimony (also known as spousal support). The deductibility of alimony paid by a spouse meant the recipient of alimony was to pay taxes on the receipt of this money.  A recent article in USA Today does a good job of explaining the genesis of this new law and its impact, but succinctly states statistics that illustrate why the government has been irked by the deductibility of alimony:  “The Census Bureau says 243,000 people got alimony last year, 98% of them women. The Internal Revenue Service says 361,000 taxpayers claimed they paid a total of $9.6 billion in alimony in 2015, though only 178,000 reported receiving spousal support.”

Rather than getting into the weeds of the good, bad and the ugly of the new law or the politics behind the law, this post focuses on what you need to know and consider before the new tax law on alimony takes effect on January 1, 2019.

The New Law

The new law provides that alimony paid pursuant to a divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code) executed on or before December 31, 2018, remains deductible by the payor spouse and included in the income of the recipient spouse (grandfathered “instruments”).

This is also true for grandfathered instruments that are modified after December 31, 2018. However, if the modified instrument expressly provides that the TCJA applies (i.e., that support will be a tax-free payment) to the modification, then the instrument will lose its grandfathered status.

If You Want to Deduct Spousal Support

It is not sufficient that a divorce or legal separation action be filed in 2018 to obtain a tax-deductible spousal support order.  Rather, what is required is that in 2018, a divorce or separation instrument regarding spousal support, as authorized by the Internal Revenue Code, be executed. We do not know if a temporary order is sufficient so the best course of action is to obtain a Judgment which requires concluding the divorce. If this is not possible, then the next best things that can be done is to obtain a court order either by way of an agreement of the parties (and then signed by a Judge); or, from the judge via a contested hearing.  My advice to those who want a tax-deductible order is to file a request with the court as soon as possible to obtain this order; even better, finalize your divorce and obtain a Judgment of Dissolution. It is expected the courts will be very congested because of the new tax law and therefore is it best advised to plan early. Remember, it is not sufficient to merely file a request with the court in 2018; rather, an order must be executed (established) in 2018.

If You Want to Receive Tax-Free Spousal Support

The strategy is simple…. delay. Delay the execution (establishment) of a support order and Judgment until after January 1, 2019.  If the other party does not like the delay, you may be forced to accept the taxability of support if the matter proceeds to a court order or Judgment in 2018.

The End Result

The fact of the matter is, we do not really know how the new support calculations will be impacted when considering the loss of the taxability of spousal support effective January 1, 2019, not to mention the other tax factors that will impact support calculations including but not limited to, the repeal of dependency exemptions, the cap on mortgage interest deductions on new mortgages, the cap on property tax deductions, and lower tax rates. At this point it is best to stay in touch with a family law attorney as the law is digested by the experts and as new support calculators are provided to the legal community.