Change in Alimony/Maintenance... Deductible or Not?

[003emz]

What is the name of your state? Illinois

First filed for divorce 2015. I began paying monthly maintenance in 2017 under separation agreement/court order. Still filed taxes jointly in 2017 and 2018 so no issues with deductibility of payments.

In August of 2019, divorce was finalized and monthly maintenance was adjusted. Filing 2019 taxes separately. I know the monthly maintenance for Sept to Dec 2019 is not deductible for me, based on new law.

What about Jan - Aug 2019 payments which were made under the 2017 court order?

 

[PayrollHRGuy]

It isn't the court order date that decides. It is the date paid.

 

[Taxing Matters]

It isn't the court order date that decides. It is the date paid.

No, you misunderstand the situation. In the Trump tax bill that passed Congress at the end of 2017 sections 71 and 215 of the Code were repealed. Section 71 made alimony income taxable to the person receiving it and Section 215 provided a deduction to the spouse paying it. After the repeal, alimony is no longer income to person receiving it and no longer deductible to the person paying it. This change made alimony treated the same as for child support.

But when Congress passed the bill, it was mindful that a large number of existing divorce decrees had alimony orders that were based on the idea of the payments being deductible to the person paying it. The amounts of alimony were in part based on that very tax treatment. Simply upending all those existing arrangements that had depended on the prior law would have provoked a huge outcry and likely caused a number of people to go back to court to try to change the way the alimony was structured. Congress did not want that. So in the bill Congress provided that the repeal only applied to those alimony orders or agreements that were (1) executed after December 31, 2018 or (2) to orders or agreements that were executed on or before that date but that are modified after that and that expressly state that the repeal provisions of the Act apply to the modification.

First filed for divorce 2015. I began paying monthly maintenance in 2017 under separation agreement/court order. Still filed taxes jointly in 2017 and 2018 so no issues with deductibility of payments.

In August of 2019, divorce was finalized and monthly maintenance was adjusted. Filing 2019 taxes separately. I know the monthly maintenance for Sept to Dec 2019 is not deductible for me, based on new law.

What about Jan - Aug 2019 payments which were made under the 2017 court order?

The payments made under the 2017 order would still get treated under the law prior to repeal as discussed above. So alimony payments made under the 2017 order that were actually paid in 2019 would be deductible on your 2019 return.

I assume that the final order in the divorce was a new order that completely displaced the temporary orders you had before (that's how it works in all the states I've practiced) and thus was not a modification of the previous order. As a result, I agree that the payments made pursuant to the final August 2019 order would be subject to the repeal and as a result those payments would not be deductible alimony for you.

 

[LdiJ]

What is the name of your state? Illinois

First filed for divorce 2015. I began paying monthly maintenance in 2017 under separation agreement/court order. Still filed taxes jointly in 2017 and 2018 so no issues with deductibility of payments.

In August of 2019, divorce was finalized and monthly maintenance was adjusted. Filing 2019 taxes separately. I know the monthly maintenance for Sept to Dec 2019 is not deductible for me, based on new law.

What about Jan - Aug 2019 payments which were made under the 2017 court order?

In order to take the deduction, you have to give any software you use your date of divorce. Your date of divorce is after 12/31/2018. Therefore, at a minimum you would not be able to file electronically and take the deduction. Whether or not you can legitimately take the deduction for the maintenance you paid under the old order, via a paper return, is something that I am not prepared to express an opinion on at this point. I would have to research it.

There are other tax professionals here who might have some more current info than mine, off the tops of their heads.

 

[003emz]

No, you misunderstand the situation. In the Trump tax bill that passed Congress at the end of 2017 sections 71 and 215 of the Code were repealed. Section 71 made alimony income taxable to the person receiving it and Section 215 provided a deduction to the spouse paying it. After the repeal, alimony is no longer income to person receiving it and no longer deductible to the person paying it. This change made alimony treated the same as for child support.

But when Congress passed the bill, it was mindful that a large number of existing divorce decrees had alimony orders that were based on the idea of the payments being deductible to the person paying it. The amounts of alimony were in part based on that very tax treatment. Simply upending all those existing arrangements that had depended on the prior law would have provoked a huge outcry and likely caused a number of people to go back to court to try to change the way the alimony was structured. Congress did not want that. So in the bill Congress provided that the repeal only applied to those alimony orders or agreements that were (1) executed after December 31, 2018 or (2) to orders or agreements that were executed on or before that date but that are modified after that and that expressly state that the repeal provisions of the Act apply to the modification.


The payments made under the 2017 order would still get treated under the law prior to repeal as discussed above. So alimony payments made under the 2017 order that were actually paid in 2019 would be deductible on your 2019 return.

I assume that the final order in the divorce was a new order that completely displaced the temporary orders you had before (that's how it works in all the states I've practiced) and thus was not a modification of the previous order. As a result, I agree that the payments made pursuant to the final August 2019 order would be subject to the repeal and as a result those payments would not be deductible alimony for you.

Thank you. Someone who gets the question and answers it in a straightforward and complete way. You are unique among all who responded on 3 forums! Now I just hope you are correct!

 

[003emz]

In order to take the deduction, you have to give any software you use your date of divorce. Your date of divorce is after 12/31/2018. Therefore, at a minimum you would not be able to file electronically and take the deduction. Whether or not you can legitimately take the deduction for the maintenance you paid under the old order, via a paper return, is something that I am not prepared to express an opinion on at this point. I would have to research it.

There are other tax professionals here who might have some more current info than mine, off the tops of their heads.

Well, in turbo tax it asked me for the date of "divorce or separation". Since I was entering data for payments made under the separation agreement, I put in the date of the separation which was 2017.

Then it asked me if that order was subsequently modified and I said no because the final was a new judgment after trial.

I didn't see any need to enter the date of the divorce anywhere because I was not submitting any payments made after the divorce date. Seemed to go smoothly. Hopefully, it is correct. At the very least, seems reasonable to justify how I filled it out.

 

[PayrollHRGuy]

So in the bill Congress provided that the repeal only applied to those alimony orders or agreements that were (1) executed after December 31, 2018 or (2) to orders or agreements that were executed on or before that date but that are modified after that and that expressly state that the repeal provisions of the Act apply to the modification.

Good to know. Is this about the only payment that the IRS looks at the agreement date instead of the pay date?

 

[Taxing Matters]

Good to know. Is this about the only payment that the IRS looks at the agreement date instead of the pay date?

It's two different issues. The issue the OP had was whether the payment was eligible to be deducted at all. When the law changes, as was the issue here, you look to the stated effective dates of the change to determine when the change takes effect. In this case, Congress decided to make the effective date for the repeal based when the order or agreement was executed.

As to which tax year the deduction (once it's established the taxpayer gets a deduction) may be taken, the basic rule for cash basis taxpayers is that the deduction is taken in the year the deductible expense is paid.

 

[Taxing Matters]

Thank you. Someone who gets the question and answers it in a straightforward and complete way. You are unique among all who responded on 3 forums! Now I just hope you are correct!

Thank you. I read the actual text of the Trump tax act (Public Law 115-97) passed by Congress for the information on the effective date of the change so I am confident that the information I gave you on when the repeal takes effect is accurate. I'm pretty sure I'm the only one in this forum that did that. Most forum members here are not lawyers or tax professionals, so the detail of answers you will get varies from one member to the next. That's my experience with other forums like this, too. That's why it's good to wait a bit and see all the replies you get when posting on forums rather than just running with the first one you get.