Reversing the tax burden of alimony through legislation, the Congress ensured that alimony will not be tax deductible for the payer spouse, and will no longer be considered gross income for the recipient.
By Briggs Stahl and Connie Rossi, Forensic Accountants
The Tax Cuts and Jobs Act (H.R.1) passed by Congress in December 2017 has effectively reversed the tax burden of alimony beginning in 2019. But fear not, there are exclusions for family lawyers who act quickly for their clients.
The changes to the tax code will require family law professionals to plan for more than just the new alimony provisions, however. Changes to the individual and corporate tax rates could also affect
planning and negotiation of alimony in divorce proceedings.
Reversing the Tax Burden of Alimony: Important features of the New Law
Under the new Act, alimony payments will not be tax deductible for the payer spouse, and alimony will no longer be considered gross income for the recipient in divorces and legal separations that are executed on or after January 1, 2019. This new alimony provision is not retroactive, and does not apply to divorces and separation orders entered before 2019.
A few salient points regarding the new alimony provisions:
- If your client wishes to have alimony be deductible/taxable, you must finalize their divorce by December 31. Schedule the trial to allow for entry of the Court order before 2019.
- Alimony payment timing under the recapture provisions and provisions equating payments as child support will no longer create concerns for divorce after 2018. Front-end loading of support will not be an issue since alimony will not be deductible and may create opportunities for prepayment.
- The alimony and lower tax rate provisions will affect States that compute child support based on net cash available to the parties.
It is important to emphasize that the prior rules will apply to already-existing divorces and separations as well as divorces and separations that are finalized before 2019, even if those agreements are legally modified after January 1, 2019. However, under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree legally modified, they can expressly choose to invoke the new Act rules in the modification.
Impact on Financial Considerations of Divorce
There are other provisions of the Act that could impact the financial considerations of a divorce, including calculations of alimony and child support.
Tax brackets for individuals are set to decrease overall, though how much will depend on many factors. The repeal of personal and dependency exemptions, a new dollar limit on itemized deductions for state and local taxes, changes to the standard deduction for filing singly or jointly, and changes to the child tax credit will affect tax computations. These in turn will affect the available income and assets used in alimony and child support considerations for both sides.
Additionally, all miscellaneous itemized deductions currently subject to the 2% floor are repealed through 2025. Legal fees that were deductible for getting alimony are no longer deductible under this provision.
In 2018, the Act makes the corporate tax rate a flat 21%. It also eliminates the corporate alternative minimum tax. Some S-corporation and partnership owners will receive a 20% deduction for certain pass-through income. Business valuations will increase as the new corporate and flow-through rates for pass-through entities provide increased cash flow for valuation purposes.
As we look ahead to 2019, there are several changes coming that impact the family law practice area. Whether that means working to finalize a divorce or separation by the end of 2018 or considering the impacts of alimony payments on both parties in 2019 and beyond, family law professionals must keep these new provisions in mind.
Briggs Stahl, CPA, ABV, CFF, CBA is a Partner and Connie Rossi, CPA, CFF, CGMA is a Manager at RGL Forensics. Briggs has over 30 years of experience in family law cases. Connie has over 20 years of experience in all areas of taxation. She provides expert witness services family law litigation. www.rgl.com
“If your client wishes to have alimony be deductible/taxable, your must finalize their divorce by December 31. Schedule the trial to allow for entry of the Court order before 2019.”
The black letter of the new law says divorces “executed “ prior to 12/31/18 may elect the “old “ Sec 71 rules or the new law. The Committee Reports and the lack of Regs beg the question of what “executed” means. Lawyers will argue, correctly, that in their world “executed” means all the parties have signed the document.
It doesn’t mean that a final Judgement of Divorce (JOD) has been entered into the judicial system with a Judges signature.
So, if a document is legally “executed” on , say, December 31, 2018, but, the final JOD wasn’t entered into until January 2019 , which tax rules apply?
Personally, lacking any further guidance I’m advising relying on the black letter of the law and definition of “executed” in our state (NJ).
Would love your thoughts.
Jeffery D. Urbach, CFE, CVA, CPA/ABV/CFF
Partner, Urbach & Avraham, CPAs, LLP, Edison, NJ