Tax Treatment of Alimony is Changing Soon

October 29, 2018 § 2 Comments

Effective after December 31, 2018, alimony will no longer be deductible by the payor, and will no longer be income to the payee. That’s per the “Tax Cuts and Jobs Act” passed by Congress earlier this year.

The law refers to “divorce agreements executed” after December 31, 2018, which would seem to indicate that if you have a PSA executed by the parties on December 29, 2018, the payments would maintain their deductible/income character, but at least one tax expert whom I asked said that the law requires a judgment or decree either adjudicating alimony as a contested issue or incorporating an agreement.

Also, any judgment modifying alimony after the cutoff date will cause the alimony to lose its deductible/income character.

So here are some ramifications for Mississippi practitioners:

  • If you’ve been dragging out that divorce case and the current alimony treatment is important to your client, you’d better get moving; you’ve only got two months left until the change.
  • You need to think twice about modification, especially if you represent the payor. Even a slight modification of alimony after the cutoff date will cause it no longer to be deductible.
  • The parties will no longer be able to agree to deductibility or non-deductibility, or taxability or non-taxability. All alimony is non-deductible and non-taxable, no matter what the parties agree.
  • It will no longer make any sense to craft hybrid alimony provisions because taxability is no longer a factor.
  • The court is required to consider the tax consequences under the Armstrong factors. Keep that in mind as you prepare your witness list. You might want to prepare a stipulation for the court as to taxability of alimony.
  • I think this will: (a) make alimony more difficult to negotiate, and (b) have a depressing effect on amounts of alimony awarded and agreed.
  • I believe this also applies to separate maintenance, but that’s my opinion.

It’s not too soon to sit down with a tax specialist who can advise you of the consequences of this change. This has drastic strategic consequences for divorce lawyers and their clients.

 

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§ 2 Responses to Tax Treatment of Alimony is Changing Soon

  • John H. (Zeke) Downey says:

    This is just another example of why your blog is so useful, Judge. Tax treatment of alimony is the kind of thing a fellow who only does limited domestic work when it can’t be avoided might misunderstand and really get his client messed up. Thanks again.

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