Pulling the Rug Out from a House of Cards

Alimony Planning under Tax Cuts Jobs Act

Did you, in high school or college, ever wait ‘til the night before to write an important paper? I did. Needless to say, it wasn’t my best effort. It’s a bit like that with Congress and the hurriedly written Tax Cuts Jobs Act. The lion’s share of its 1,050 pages were written or overhauled in its last 12 days. That’s too fast. And, it’s a wrecking ball on our ability to interpret what much of the law means.

One such hastily, shoddily drafted new provision targets the alimony deduction. In short, for a divorce or separation instrument “executed” after 12/31/18, alimony is no longer deductible for the payer or taxable to the recipient. In Congress’ haste, they didn’t exactly tell us what “executed” means. This has led to a plethora of 2018 divorce filings racing to be grandfathered in to prior law and a host of uncertainty as to the interpretation of existing instruments sitting out there in the bushes.

In California, as is the case in Massachusetts and everywhere else, attorneys and courts are scrambling to finalize divorces by 12/31/18 to capture otherwise going, going, gone alimony deductions. Most payees don’t mind because they figure alimony awards will “knee-jerk” shrink in the future (if no deduction for payer, judges may reduce awards). Needless to say, the law change will have a huge economic impact.

Might some race out to Vegas or Mexico to get a quickie 2018 divorce with alimony in tow? Would such a divorce be effective? Would having a margarita at a Mexican roadside divorce shack impair mental ability and thus negate the effort?

Why the law change? In 2014, a Treasury Report exposed that while 567,000 returns deducted $10 billion in alimony, only 19% of recipients bothered to report their corresponding income. IRS was supposed to be (but dropped the ball on) matching against these income recipients and sniffing out cheaters. Resulting revenue loss: $644 million annually. Congress wants that money.

For divorce and separation instruments “executed” prior to 2019, the default rule is alimony will remain deductible for the payer and income to the recipient. Frustratingly, much uncertainty swirls around the term “executed”. For a written separation agreement, it’s probably the date the agreement was signed. For a divorce decree, it’s a tougher call. Will it be the date an interim order was signed (e.g., in 2018) or the later date the divorce becomes final (e.g., in 2019)?

How will pre- and post-nuptial agreements entered years ago (under the presumption spousal support is deductible) be interpreted? Might they not be considered divorce or separation instruments? This could lead to maintenance payments under them being nondeductible toast.

Better keep the peace with the evil ex, baby. Why? After 2018, if a payer of alimony or separate maintenance is dragged back into court, wine can be changed to lake water. In other words, deductible alimony under a pre-2019 instrument could be rendered nondeductible by a court if an instrument modified after 2018 so provides. Kicking the cat after 2018 might prove mighty costly.

Sound like a big mess? It is. All involved must carefully understand the issues and move forward (perhaps swiftly) with educated purpose. Who knows, maybe axing the alimony deduction will economically incentivize some couples to stay together and work out their differences. Stranger things have happened.

Copyright © 2018 Bradley Burnett