Is There Still A Way to Preserve the Alimony Deduction?


Wednesday, June 27th, 2018

What Are The Options?

The first reaction to this question is “No!”  But let’s dig a bit deeper into what options are open to the couple.

Do You Have to Be Divorced by December 31, 2018?

Possibly not.  Under code § 71, alimony and separate maintenance payments are prescribed as being deductible if, “such payment is received by (or on behalf of) a spouse under a divorce or separation instrument.”  It further states that “The term “divorce or separation instrument” 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.

Based on this part of the code, while there is no precedence for the matter, it appears that a couple need only have a separation agreement in place on December 31, 2018, for their support payments to be deductible.  The interpretation of the tax reform rules appears to indicate that regardless of the repeal of the deduction for alimony paid and corresponding inclusion in income by the recipient (effective for tax years beginning in 2019), that alimony paid under a separation agreement entered into prior to the effective date is generally grandfathered.

If there are modifications, such as the separation becoming a divorce, it is important that the provision is stated in such a way as to be part of the original agreement, incorporating those provisions of support into the final agreement.  If the modification expressly provides that the amendments made by this provision apply to such modifications, it should stand the scrutiny of IRS review.

What About After December 31, 2018?

The tax code provides some options that are not as valuable but still useful tools.  For each of these, check with a tax specialist to verify if it is an option in your situation.

Head of Household:  If there are more that one child in the marriage, it is possible to arrange for joint custody with each parent having primary custody of one child.  You may choose Head of Household filing status if you lived apart from your spouse, meet certain tests, and are considered unmarried on the last day of the year (Code Sec. 2(b); Reg. Sec. 1.2-2(b)).

You can elect Head of Household filing status even if you are not divorced or legally separated.  If you qualify as head of household (rather than as married filing separately), your tax rate may be lower, the earned income credit and certain other credits may be available.

Property Taxes:  When couples divorce, the house is generally the largest asset they hold.  The payment of taxes on that property are still deductible is the combined income, property and sales taxes do not exceed $10,000.  This can be a tax benefit to the higher income taxpayer since the limitation on itemized deductions is no longer a factor.

Interest on Mortgages:  Another deduction may be the interest paid on the property.  It is possible for an interested person, the people on the mortgage, to assume the responsibility for the debt and make the mortgage payments.  This can entitle that paying party to tax the deduction for the mortgage interest.

These are a few options that can help in managing the cash flow burdens for those going through a divorce after December 31, 2018.

For further information, contact us at oaktreemediation.com.  We will be happy to assist you in evaluating your financial options.

 

Armand & Robbin D’Alo