Why Waiting Can Cost You: Racing the Clock to Keep Your Alimony Tax Deduction

October 14th, 2018

The deadline to preserve your alimony tax deduction in California before the end of 2018 is fast approaching.

by Mark Hill, CFP, CDFA and Shawn Weber, CLS-F

With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), the deductibility of alimony or spousal support on federal taxes is set to sunset on December 31, 2018. If you plan to divorce or are in the process of a divorce that will not be completed before the end of 2018, this could cost you a lot of money.

Spousal support used to be deductible under previous law

Under the previous law, spousal support (or alimony) is deductible from income for the support payor and taxable to the support recipient. This let parties save money on Uncle Sam’s dime. Typically, the support payor would be taxed at a higher rate than the support recipient because of the disparity of income. By transferring the tax burden from the support payor to the support recipient, the support payor had higher net spendable income and could afford to pay more. This usually ended up in a win-win circumstance for the parties.

Changes to spousal support deductions under the new 2019 law

Commencing on January 1, 2019, spousal support paid under new orders will not be deductible to the support payor and will not be taxable to the support recipient. This rule will apply to alimony payments required by “divorce or separation instruments” executed after December 31, 2018.

A “divorce or separation instrument” as defined by 26 U.S. Code § 71(b)(2) “means –

(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,

(B) a written separation agreement, or

(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.”

Example from a higher income case

In negotiations husband and wife had agreed that spousaI support would be set at $12,000 a month. Because husband will be in the combined 46.3% tax bracket post-divorce, the after-tax cost to him will be $6,444. However because wife will be in the combined 34.3% bracket she will net $7,884 after tax. When the new law is in force and husband can no longer deduct his payment it would cost him $1440 more to get her the same amount of spendable money. The differential will be even greater if wife goes ahead with her plan to buy a condo next year and thus receive the deductions for mortgage interest and property taxes.

Of course the reality of divorce is that there is rarely enough money to go around and the result of this change is going to be that payors will end up paying more and payees will end up receiving less.

An additional impact of this change that we believe is not well understood is that because in California the software that calculates child support uses after-tax income as the input number used for income available for support, child support numbers will also be reduced.

Is your divorce grandfathered into the new 2019 rule? Maybe not!

However, a divorce or separation instruments in place before January 1, 2019, but modified after this date, will remain under the current rules allowing for deductibility. They would only be subject to the TCJA, if the modification expressly provides for the TCJA to apply.

What does this mean for people in the midst of a divorce today? To preserve the possibility of the alimony payment tax deduction, you MUST have a divorce instrument entered by a court before the end of 2018.

Your judgment MUST be entered in 2018 to be deductible.

Although it is unclear exactly how the IRS will interpret this rule, we believe it is crucial that the divorce instrument be entered before the end of the year to preserve deductibility forever (or at least until the rule is changed again).

A huge concern is that the courts are very much behind in the processing of judgments of divorce or legal separation. Time is of the essence. If a couple does not have a completed judgment to submit prior to middle of November 2018, there is a very strong likelihood that it will not be accepted by the court in time. Thus, the parties would lose the benefit of deductibility because there divorce or separation instrument would not be enterd before 2019.

Let Weber Dispute Resolution and Pacific Divorce Management help you keep your alimony tax deduction into 2019,

To help parties maximize what they have to spend for themselves and their kids after divorce, Weber Dispute Resolution is teaming up with Pacific Divorce Management to offer an expedited to process.

Pacific Divorce Management, one of the premier advising firms in San Diego for financial issues in divorce, will work with parties to gather financial data to complete the State mandated Declaration of Disclosure Forms.

Weber Dispute Resolution, a leader in divorce mediation and legal dispute resolution, will prepare the necessary forms to open a divorce case and will work hand in glove with Pacific Divorce Management to prepare the necessary divorce or separation instrument necessary to satisfy the IRS requirements for deductibility.

If it is impossible to conclude the entire divorce prior to 2019, the parties could enter into a partial stipulated Judgment for spousal support that would meet the requirements for the alimony deduction. The couple would then have the following options:

Work with Pacific Divorce Management and Weber Dispute Resolution in an out-of-court alternative dispute resolution setting to complete their divorce or legal separation (for example, mediation or collaborative practice).
Work with other professionals in an out-of-court alternative dispute resolution setting to complete their case.
Litigate their divorce or legal separation with other professionals.

Whether you choose to complete your divorce with us or choose to go another way, we want to help all parties involved in a late 2018 divorce be aware of this change, and take advantage of the tax laws for deductibility of spousal support payments before it goes away forever.

Don’t delay – contact us today to save your alimony tax deduction:

Weber Dispute Resolution: 858-410-0144

Pacific Divorce Management: 858-509-2330

Categories Alimony, divorce, Finances, Spousal Support, Taxation
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Video FAQ: Are my divorce attorneys’ fees tax deductible?

by Shawn Weber

March 3rd, 2015

Categories Finances, Taxation
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Here’s a good summary about social security and divorce

by Shawn Weber

July 19th, 2014

Here’s a good summary about social security & #divorce with some surprisingly helpful points. http://ow.ly/zbPNE

Categories Finances, Taxation
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My ex and I are divorced, but have a child together. Can I claim the dependency exemption for my child on my taxes?

by Shawn Weber

March 29th, 2013

Rules regarding who can claim a child on his/her taxes can be found in IRS Publication 596. In general, you can only qualify to claim a child for a tax credit or dependency exemption if the child has lived with you for over half of the year.

However, sometimes in crafting child support orders, family law professionals and courts deliberately plan to give the noncustodial parent the dependency exemption and child tax credit. This is especially true if the support recipient has lower income and is in a lower tax bracket and the supporting parent is in a higher tax bracket. The party in the higher tax bracket may be able to make better use of the exemption and credit. Sometimes allowing that person to claim a child will enable us to order a higher amount of support because there is more disposable income available to pay support. It’s a win-win for everyone.

The IRS allows the noncustodial parent to claim a child if each of the following requirements are met:

“1. The parents:

a. Are divorced or legally separated under a decree of divorce or separate

maintenance,

b. Are separated under a written separation agreement, or

c. Lived apart at all times during the last 6 months of 2012, whether or not they are

or were married.

2. The child received over half of his or her support for the year from the parents.

3. The child is in the custody of one or both parents for more than half of 2012.

4. Either of the following statements is true.

a. The custodial parent signs Form 8332 or a substantially similar statement that he

or she will not claim the child as a dependent for the year, and the noncustodial

parent attaches the form or statement to his or her return. If the divorce decree or

separation agreement went into effect after 1984 and before 2009, the

noncustodial parent may be able to attach certain pages from the decree or

agreement instead of Form 8332.

b. A pre-1985 decree of divorce or separate maintenance or written separation

agreement that applies to 2012 provides that the noncustodial parent can claim

the child as a dependent, and the noncustodial parent provides at least $600 for

support of the child during 2012.”

IRS Publication 596 (2012) [http://www.irs.gov/pub/irs-pdf/p596.pdf].

Remember, without a signed Form 8332 or equivalent, the noncustodial parent may not claim the child.

This article is intended for informational purposes only and should not be construed as legal or tax advice. Remember, because every case is different, nothing replaces personalized advice from a professional. For further discussion of divorce and custody related tax issues, call attorney Shawn Weber at 858-410-0144 for a free telephone conference or go to his website at WeberDisputeResolution.com.

Categories Children, custody, divorce, Finances, Relationships, Taxation
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Can I deduct my divorce or family law legal fees on my taxes?

by Shawn Weber

October 15th, 2011

Generally, divorce fees are not deductible.

The general rule is that divorce is a personal expense and is not deductible as a business expense. United States v. Gilmore (Gilmore I) (1963) 372 U.S. 39. So the short and easy answer is, “No.”

However, don’t despair. There are still some ways you can get a break from some of those fees.

Here are some exceptions to the general rule:

Fees to obtain alimony or taxable pension distribution.

If you are a spousal support or alimony recipient, you can deduct those fees relating to obtaining taxable spousal support or a taxable pensions distribution. (See I.R.C. § 212(1); Treas Reg. 1.262-1(b)(7); Wild v. Commr. (1964) 42 T.C. 706. So, those fees that you spend with your attorney to get spousal support from your ex can usually be deducted. Don’t forget, the fees for getting your share of a pension distribution may also be deductible.

Tax planning or advice.

The costs of tax planning or advice are deductible. I.R.C. § 212(3). We family lawyers tend to shy away from giving anyone tax advice because we are, for the most part, not tax attorneys or CPAs. However, there can be occasion as you are planning your divorce or legal separation that your attorney gives you some tax advice. (For example, tax advice about dependency exemptions, deductibility of spousal support payments, post-divorce real estate transfers, etc.) When that happens, the associated fees can be deductible.

Capitalize.

Even if the fees for your divorce lawyer aren’t deductible, expenses can often be capitalized. Serianni v. Commissioner (11 Cir 1985) 765 F.2d 1051, 1985 CFLR 2892. Talk to your CPA about how this can be done.

Below the line.

Now these aren’t the greatest of deductions because they are below the line. But every little bit helps… right?

Talk to your lawyer early!

If you are interested in deducting some of your legal fees on your taxes, it is important that you have a conversation with your family law attorney early so that (s)he knows to keep track of your fees and what portions may be deductible. Typically, your attorney can give you a letter at the end of the year indicating what portion of your fees was, for example, associated with the collection of alimony. Usually, this so-called “allocation letter” sent by the attorney to the client will suffice as sufficient proof of the deduction to satisfy the IRS. Goldaper v. Commissioner (1977) T.C. Memo. 1977-343, 36 T.C.M. 1381, 1979 AFLTR 1110. However, if your attorney doesn’t know that you will want to claim this deduction, you will put him in the difficult and awkward position of trying to recreate his records. It’s better that he knows from the outset so that (s)he can keep better track.

As with every tax question, it’s a really good idea to talk it over with your CPA. The rules can be complex and there are limitations. However, with a little diligence, you may save some money at tax time.

Categories Attorneys, divorce, Finances, Spousal Support, Taxation
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Pacific Divorce Management : Alimony Taxation – Part 7

by Shawn Weber

February 23rd, 2011

My friend and Certified Divorce Financial Analyst, Justin Reckers, recently did a great post on alimony and taxation. It’s worth a read. Pacific Divorce Management : Alimony Taxation – Part 7.

Categories Alimony, divorce, Spousal Support, Taxation
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Archive for Taxation

Why Waiting Can Cost You: Racing the Clock to Keep Your Alimony Tax Deduction

Spousal support used to be deductible under previous law