The most profound effect the new Tax Cuts and Jobs Act (TCJA) has had on divorce planning is with regard to taxation of alimony payments. Before TCJA, payments that could be defined under tax-law as alimony would be considered deductible by the payor for federal income tax purposes, while the recipients of alimony would have to report the payments as taxable income.
Under the new rules, however, the payor is no longer be able to deduct alimony payments and the recipient no longer pays tax on the income. This change applies to support or maintenance payments made pursuant to a judgment, written separation agreement or temporary order that is either:
• Executed after 12/31/2018
• Executed on or before 12/31/2018 but modified after that date, if the modification expressly provides that the amendments made by this section apply to such modification.
It is clear that a judgment, temporary order or written separation agreement entered prior to January 1, 2019, falls under the pre-TCJA law and maintains its tax-deductible/taxable status as defined in the judgment, temporary order or written separation agreement. It is also clear that any modifications made after December 31, 2018, would need to expressly provide that TCJA was applicable in order to lose the tax-deductible/taxable status from the prior order.
For temporary orders, judgments or written separation agreement that contain initial orders for alimony or spousal support entered after December 31, 2018, the new TCJA law applies and spousal support is not tax-deductible to the payor and not taxable to the payee.
What is unclear is whether a pre-December 31, 2018 order, judgment or separation agreement that is changed by a subsequent judgment of dissolution would qualify to the tax treatment specified in the pre-December 31, 2018 order. Whether the pre-TCJA or TCJA tax regulations will apply to these judgments is a matter yet to be decided.
In addition, California has not conformed to the new law and parties could find themselves in a situation where under California law they would have deductible and taxable alimony but for federal purposes, the alimony paid would be nondeductible and nontaxable.
For a consultation on your specific situation, Call Rachel Castrejon.