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.

 

MAKING SURE YOUR CLIENT GETS THE PROPER TAX TREATMENT OF ALIMONY

January 31, 2011 § Leave a comment

An important factor in determining whether to award alimony is the tax consequences of the court order.  We all know that periodic alimony is income to the payee and deductible by the payer if it meets the IRS’s requirements.

So what does the IRS consider to be the essential ingredients of an alimony award, either by agreement or by adjudication?  Section 71(b) of the Internal Revenue Code (IRC) provides that the following must apply:

  1. There must be cash payments to the recipient or third-party payments;
  2. Payments must be required by a written instrument;
  3. Instrument must not designate the payment as “not alimony” or as some other form of payment;
  4. The payer and payee must not be members of the same household;
  5. Payments may not be treated as child support;
  6. Payments must cease on death of the recipient;
  7. The parties may not file a joint tax return.

Payments that will not be treated as alimony by the IRS include:  child support; noncash transfers; payments that are part of a spouse’s community property income; payments for use of property; and payments for maintainenance or upkeep of the payer’s property.  Lump sum alimony, which is really an equalizing payment in equitable distribution, is not considered alimony by the IRS.

If you’re planning to use the form to prove the tax effects of alimony that I posted previously, you need to update it to conform to the latest version of IRC § 71(b).

It’s important to give some thought to these provisions regardless of which side you are on in an alimony dispute.  If you represent the client trying to get some cash, you might consider proposing to the court or negotiating for it to be in the form of a property division; as such, it would not be considered income.  Likewise, you can propose to the judge or negotiate for the payment to omit one of the ingredients above.  If you represent the party who will have to pay, make sure you get all of the essential ingredients included so that your client’s payments will be deductible.

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