Further on the Tax Treatment of Alimony

October 31, 2018 § Leave a comment

A couple of days ago I posted about the big change in tax treatment of alimony coming after December 31, 2018.

Here are some points brought to my attention that correct and fine-tune that post:

  • I said that there must be a judgment pre-dating the demarcation date. Other tax experts believe that a binding agreement for alimony to be treated for taxes as it currently exists will satisfy the law. The key is that the agreement must on its face be binding. To me that means either a PSA or a consent with alimony as an agreed issue presented to the court for approval or some other proceeding to make it binding.
  • I also said that modification would result in making the pre-demarcation-date-alimony non-deductible and non-taxable. A more accurate statement is that modification may, in some cases, change the tax treatment. It’s too complicated for me to elaborate on here, but you need to get some competent guidance before jumping into any alimony modification post December 31, 2018.

Those are the tweaks. Here are two of my own observations:

  • Don’t expect judges to be familiar with all of the nuances of these changes. Be prepared to offer expert testimony or stipulations that cover these points.
  • Get some competent tax advice so that you can properly and accurately advise your clients. That disclaimer in your retainer agreements and PSA’s about tax advice does not relieve you of the obligation to be able to advise your clients about basics such as tax treatment of alimony and the pitfalls of modification because that’s not really tax advice — it’s divorce advice.

Thanks to the lawyer who called this to my attention.

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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