Lock It in Now: Deduction for Alimony Set to Expire After 12/31/18
As part of the Tax Cut & Jobs Act of 2017 (the “TCJA”), Congress included provisions to repeal the deduction of alimony under Internal Revenue Code (“IRC”) § which called for a corresponding inclusion of alimony in the income of the recipient where such alimony was deducted by the payee under IRC §215.
While many provisions of the TCJA came into effect on January 1, 2018, the repeal of the alimony deductions and corresponding repeal of related provisions is only effective for divorce or separate instrument executed after December 31, 2018 and those amended after such dated but only if the modification expressly provides that amendments made by the TCJA apply to the modification.[1] Accordingly, for couples who are in the process of getting a divorce, time is almost out to get the divorce decree or separation instrument finalized. If done after December 31, 2018, any alimony will not be deducted.
Deduction for Alimony Payments
IRC §215 states that an individual may deduct an amount equal to the alimony or separate maintenance payments paid during the individual’s tax year.[2] For simplification purposes, I will refer to such payments as alimony throughout this article though the technical term used throughout the IRC is ” alimony or separate maintenance payment”.
What is Alimony?
IRC §71 states that gross income includes amounts received as “alimony or separate maintenance payments.”[3] Alimony is defined by IRC §71(b). For a payment to qualify as alimony, IRC §71(b) requires that the payment must satisfy all of the following requirements:
- It must be paid in cash (or cash equivalent)[4];
- It must be received by (or on behalf) a spouse under a divorce or separation instrument[5];
- The divorce or separation instrument cannot specifically designate such payment as a payment which is not includable in income under IRC §71 and not allowable as a deduction under IRC §215[6];
- The payor spouse and payee spouse may not be members of the same household at the time the payment is made[7]; and
- There is no liability to continue making any payments or substitutes for the same after the death of the payee spouse[8].
- The payment cannot payable for the support of children of the payor spouse.[9] The rules here as to what constitutes child support and what may be deemed to constitute child support are complicated and beyond the scope of this article, but this prohibition needs to be kept in mind anytime there is both alimony and child support being paid in a divorce agreement.
In addition to the child support prohibition, taxpayers should be aware of the excess alimony payment rules found in IRC §71(f).
What is a “Divorce or Separation Instrument”?
As noted above, a key requirement for a payment to qualify as alimony is that it be paid pursuant to a “divorce or separation instrument”.[10] The term “divorce or separation instrument” means:
- A decree of divorce or separate maintenance or a written instrument incident to such a decree[11];
- A written separation agreement[12]; or
- A decree (not described above) requiring a spouse to make payments for the support or maintenance of the other spouse[13].
Treas. Reg. §1.71-1(b) sheds some further insight here. In the case of a divorce or legal separation agreement, payments made under such agreement must “be made in discharge of a legal obligation imposed upon or incurred by the husband because of the marital or family relationship under a court order or decree divorcing or legally separating the husband and wife or a written instrument incident to the divorce status or legal separation status.”[14]
In the case of a written separation agreement, the payments must “be made under the terms of the written separation agreement after its execution and because of the marital or family relationship. Such payments are includible in the [payee spouse]’s gross income whether or not the agreement is a legally enforceable instrument. Moreover, if the [payee spouse] is divorced or legally separated subsequent to the written separation agreement, payments made under such agreement continue to fall within the provisions of section 71(a)(2).”[15]
In the case of a decree for support or maintenance, Treas. Reg. §1.71-1(b)(3) states the following:
Where the [spouses] are separated and living apart and do not file a joint income tax return for the taxable year, paragraph (3) of section 71(a) requires the inclusion in the gross income of the [payee spouse] of periodic payments (whether or not made at regular intervals) received…under any type of court order or decree (including an interlocutory decree of divorce or a decree of alimony pendente lite)…requiring the [payor spouse] to make the payments for [the payee spouse’s] support or maintenance. It is not necessary for the [payee spouse] to be legally separated or divorced from [the payor spouse] under a court order or decree; nor is it necessary for the order or decree for support to be for the purpose of enforcing a written separation agreement.
This terminology plays a key role in whether alimony is deductible after December 31, 2018 a discussed below.
Changes Made by the Tax Cut and Jobs Act of 2017
Section 11051 of the TCJA is titled “Repeal of Deduction for Alimony Payments”. In short, Section 11051 repeals IRC §§71 and 215 in addition to other corresponding provisions of the IRC related to alimony.
While the many of the provisions of the TCJA took effect on January 1, 2018, Section 11051 only applies to a “divorce or separation instrument (as defined by section 71(b)(2)…executed after December 31, 2018” or any divorce or separation instrument “executed before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.”[16]
As you can see, the TCJA incorporates the definition of a “divorce or separation instrument” from IRC §71(b)(2), discussed above. Thus, this terminology plays a key role in locking in the deduction by December 31, 2018 for those wishing to do so.
Another important point to note is that these changes made by Section 11051 of the TCJA do not sunset at the end of 2026 like many other provisions of the TCJA. In other words, the changes made by Section 11051 of the TCJA will be on the books indefinitely unless later changed by Congress.
Conclusion
In conclusion, the deduction for alimony is somewhat complicated and must meet some stringent requirements in order for payments to qualify. While the rush may be on to lock in the deduction, taxpayers must be mindful that they do not overlook one or more the requirements that might prevent their payment from qualifying as alimony. Taxpayers who are looking to lock in the deduction need to have something in writing that complies with this definition of a “divorce or separation instrument” as found in IRC §71(b)(2). , and the payments required under the writing must meet all the requirements for a payment to be considered as “alimony or separate maintenance payments” under IRC §§71 and 215 as well as the related Treasury Regulations.
[1] Section 11051(c) of the TCJA
[2] IRC §215(a)
[3] IRC §71(a)
[4] IRC §71(b)(1); Note that cash may be paid to a third party on behalf of the payee spouse as well. See Treas. Reg. §1.71-1T, Q&A 6
[5] IRC §71(b)(1)(A)
[6] IRC §71(b)(1)(B)
[7] IRC §71(b)(1)(C)
[8] IRC §71(b)(1)(D)
[9] IRC §71(c)
[10] IRC §71(b)(1)(A)
[11] IRC §71(b)(2)(A)
[12] IRC §71(b)(2)(B)
[13] IRC §71(b)(2)(C)
[14] Treas. Reg. §1.71-1(b)(1)(i)
[15] Treas. Reg. §1.71-1(b)(1)(ii)
[16] TCJA Section 11051(c)
