Divorcing couples should consider the impact of 2018 Tax Code Changes on alimony

If your divorce is executed after December 31, 2018, alimony will not be deductible in your federal taxes if you’re the payor, and it’ll not be included in your gross earnings if you’re the recipient.

This is a change to the tax code, per the Tax Cuts and Jobs Act.

That mentioned, alimony agreements executed on or earlier than December 31, 2018, are grandfathered into the outdated regulation, which means the payor partner can deduct his or her funds, and the recipient partner should report these funds as half of his or her gross earnings.

What are the necessities for alimony?

Various payments from one ex-spouse are directed to the other ex-spouse, which might include property division payments, spousal support or child support

Before we focus on the technicalities of the regulation, let’s take a second to outline alimony. Under the agreements of a divorce, varied funds from one ex-partner are directed to the opposite ex-partner, which could embrace property division funds, alimony (also called spousal assist), child support, and voluntary funds to the ex-partner.

In order to be thought of alimony for tax functions, alimony funds should:

1. Be stipulated within the divorce decree or legal separation.

2. Paid in money (which incorporates checks).

3. Stop on the ex-partner’s demise.

In addition, the ex-spouses can not dwell collectively.

What occurs to present and modified alimony agreements underneath the brand new regulation?

Existing alimony agreements which are modified after December 31, 2018, can be grandfathered into the outdated regulation, which means the payor will deduct the fee and the recipient will embrace alimony as half of his or her outdated earnings. However, the modified settlement can expressly ask to have the brand new guidelines apply, which means fee is not going to be deductible, and receipt of alimony is not going to be included in gross earnings.

But wait, your state taxes could be totally different

The Tax Cuts and Jobs Act applies to federal taxes only

The Tax Cuts and Jobs Act applies to federal taxes solely, which means that in California, when the federal change takes place on January 1, 2019, your state alimony funds will nonetheless be deductible on state taxes if you’re the payor and included in gross earnings on your state taxes if you’re the recipient.

California may change this in tandem with the TCJA, however as of right now, state and federal legal guidelines can be inconsistent come January 1, 2019.

If that is complicated, here’s a fast abstract:

California State Taxes

Alimony is deductible if you’re the payor, and it’s included in gross earnings if you’re the recipient.

Current Federal Taxes

Alimony is deductible if you’re the payor, and it’s included in gross earnings if you’re the recipient.

Federal Taxes Beginning January 1, 2019

For alimony agreements executed on or after January 1, 2019, alimony is not going to be deductible if you’re the payor, and it’ll not be included in gross earnings if you’re the recipient.

Unless the modified settlement expressly asks to have the brand new TCJA guidelines apply, alimony agreements executed earlier than January 1, 2019, and modified after December 31, 2018, can be grandfathered into the outdated regulation. If an settlement modified after December 31, 2018, expressly asks to have the brand new TCJA guidelines apply, the payor can be unable to deduct the fee from federal taxes, and the recipient is not going to embrace the fee in gross earnings.

Here is an instance

If the divorcing couples do not expressly provide that the TCJA applies to their new modified agreement, there continues to be deduction in the payment

Sarah and Mike divorce in 2017. Under the settlement, Sarah pays Mike $15,000 a yr in alimony.

In 2019, Sarah continues to obtain a deduction yearly on her private earnings tax return (each federal and state) of $15,000, and Mike should embrace $15,000 alimony in his gross earnings for each federal and state taxes.

In 2020, Sarah and Mike modify their alimony settlement. They don’t expressly present that the TCJA applies to their new modified settlement. Therefore, Sarah continues to deduct her funds, and Mike continues to incorporate the alimony funds in his earnings.

In 2021, they modify their alimony settlement once more. This time, they embrace within the written settlement that the TCJA applies to their modified settlement. At this level, Sarah stops deducting funds from her federal taxes, and Mike stops together with the funds in his earnings for his federal taxes. However, because the state regulation stands, Sarah continues deducting funds on her California tax returns, and Mike continues together with the alimony in his earnings on his state tax returns.  

Here is one other instance

Bill and Jamee divorce in 2019. They agree that Bill can pay Jamee $24,000 a yr in alimony funds. Because the divorce was executed after December 31, 2018, they don’t have any alternative however to comply with the TCJA rules for federal taxes: Bill can not deduct the funds, and Jamee doesn’t embrace them in her gross earnings. However, because the state regulation stands, Bill deducts funds on his California tax returns, and Jamee consists of the alimony in her earnings on her state tax returns

A ultimate be aware

In California, there is a minimum six-month waiting period from the time a divorce is filed until the date it is final

Remember that in California, there’s a minimal six-month ready interval from the time a divorce is filed till the date it’s ultimate. This is true even when the couple is in agreement about the settlement. This signifies that a divorce filed after July 1, 2018, is not going to be ultimate till 2019, at which level the TCJA can be in impact.

Found this beneficial? You can comply with David on Twitter or get in contact along with his firm.

David A. Fenton is an skilled supplier of tax planning, compliance and enterprise consulting providers. His focus is on the distinctive wants of purchasers in the true property, healthcare, and leisure industries. In 2003, David Fenton based the CPA agency: Fenton & Ross. Over the years, David has suggested a whole lot of companies on varied tax and operational points and has ready hundreds of tax returns for companies and their house owners. As a licensed public accountant, Mr Fenton is a member of the California Society of Certified Public Accountants and the American Institute of Certified Public Accountants.
David is married to spouse Jodi and has two younger kids. Outside of his household life, David is energetic locally and at the moment serves on the board of administrators for the Jewish Big Brothers of Los Angeles. He can be the Treasurer for the nonprofit group – Parents Education League of Los Angeles.




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