As a family law practitioner who handles numerous divorces, you undoubtedly already know that the Tax Cuts and Jobs Act passed by Congress late last year and signed into law by President Trump on December 22, 2017, eliminates the alimony deduction that has been a staple of divorce negotiations since 1942.
Precisely how the new law will affect your practice this year depends on the state in which you practice and which of your divorce clients are potential alimony payers as opposed to receivers. Their interests always were at odds, and the TCJA makes them even more so.
2018 Considerations
Unlike most of the TCJA provisions, the alimony income tax changes do not go into effect until January 1, 2019. Therefore, for any divorces and/or separation agreements you finalize this year, the current law still applies. Per the ABA Journal, your clients who pay alimony, a/k/a spousal support, will still be able to deduct their alimony payments.
Politico gives the following example: Your high-asset clients earning $250,000 a year are in the 24 percent income tax bracket. Therefore, if they agree to pay $4,000 per month in alimony, the resulting $48,000 annual alimony payment really costs them only $3,000 after taking the deduction. This enormous tax savings is an incentive for these clients to agree to pay higher alimony. It also is an incentive for them to agree in other areas as well so as to hasten the finalization of their divorce before everything changes nine months from now.
For your clients seeking alimony, however, the TCJA’s alimony income tax effects are just the opposite. The current tax advantage for their spouses acts as an incentive for them to ask for the alimony they need to allow them to live reasonably comfortably after their divorce. On the other hand, the new law also gives them an incentive to delay their divorce. Why? Because for the divorces you finalize in 2019 and afterward, they no longer will have to declare their alimony as income on their federal income tax returns.
Qualifying Alimony Payments
Per MarketWatch, the documents you draft on behalf of your 2018 divorce clients must meet the following six requirements to be eligible for continued income tax deductibility:
- The payments must be included as part of a written divorce decree, separate maintenance agreement, or separation agreement.
- The payments must be made to or on behalf of the ex-spouse receiving the alimony.
- The payments must be made in cash or a cash equivalent.
- The payments must be specifically set out as alimony or spousal support.
- The payments cannot be any that specifically or impliedly include child support.
- The payments must cease at a specific time in the future or upon the death of the ex-spouse receiving them, whichever occurs first.
Be sure to advise your clients that they cannot cohabitate with their ex-spouse after their divorce, nor can they file a joint tax return with him or her. If they do, the alimony payments will be disqualified for deduction purposes. In addition, the payer must include the payee’s Social Security number on his or her tax return.
For more information on additional financial issues you need to be aware of, how gaining your Certified Financial Litigator credential will give you the financial knowledge and skills you need to attract additional high-asset clients, and the other benefits of AACFL membership, please visit this page on our site.
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