When Can I Deduct Alimony on my Federal Tax Return Ordered Prior to December 31, 2018

When divorce occurs, one ex-spouse is often obligated to make continuing payments to the other spouse. However, for the payments to be deducted by the payer, they must meet the tax-law definition of alimony. For any particular payment to qualify as deductible alimony for federal income tax purposes and meet the tax law definition of alimony, all the following requirements must be met:

  1. The payment must be made pursuant to a written divorce decree or separation agreement such as a temporary support order. Note that payments made in advance of signing a written divorce or separation agreement or before the effective date of a court order or decree cannot be deductible alimony. Such payments are considered voluntary and are therefore nondeductible. The same is true for payment of amounts in excess of what is required under a written divorce decree or separation agreement.
  2. The payment must be to or on behalf of a spouse or ex-spouse. Therefore, payments to third parties, such as attorneys and mortgage companies, are okay if made on behalf of a spouse or ex-spouse and pursuant to a divorce decree or separation agreement.
  3. The divorce decree or separation agreement must state the payments are alimony.
  4. After divorce or legal separation (meaning the couple is considered divorced for federal income tax purposes), the ex-spouses cannot live in the same household or file a joint return for the year they separated or thereafter.
  5. The payment must be made in cash or cash equivalent such as check or money order.
  6. The payment cannot be fixed or deemed child support in the divorce decree.
    Fixed child support simply refers to amounts designated as such in the divorce or separation agreement, so it’s easy to identify. Payments are considered to be deemed child support if they are terminated or reduced by any of the following so-called contingencies relating to a child: a. Attaining the age 18, or the local age of majority.
    b. Death.
    c. Marriage.
    d. Completion of schooling.
    e. Leaving the ex-spouse’s household.
    f. Attaining a specified income level.
  7. The payer’s return is required to include the recipient’s social security number.
  8. The obligation to make payments (other than payment of delinquent amounts) must cease if the recipient party dies. If the divorce decree is unclear about whether or not payments must continue, state law controls. If under state law, the payer must continue to make payments after the recipient’s death, the payments cannot be alimony. Therefore, to avoid problems, the divorce decree should always explicitly stipulate whether a payment obligation continues to exist after the death of the recipient party. Failing this test is probably the most common cause for lost alimony deductions.
  9. There is also an IRS rule that states if alimony payments decrease by more than
    $15,000 per year between years 1 and 2, or years 2 and 3, then part of the payments will not qualify for a tax deduction to the payor (and hence will not be taxable to the payee.) In other words, if alimony payments total more than $15,000 per year then they must last more than one year and cannot be reduced too quickly. The reason for this is because the IRS sees this as a property settlement, not alimony. Because of this rule replacing all monthly payments with a lump sum “alimony” payment that is paid all in one year will often cause a trigger of this recapture rule, since alimony will go down to $0 in year

Keep in mind the Tax Cuts Jobs Act repealed the deduction for alimony paid and the corresponding inclusion of alimony in income by the recipient. The provision is effective for any divorce or separation agreement executed after December 31, 2018, or for any divorce or separation agreement executed on or before December 31, 2018, and modified after that date, if the modification expressly provides that the amendments made by this provision apply to such modification. Thus, alimony paid under a separation agreement entered into prior to the effective date is generally grandfathered.

It is very important to consult a tax attorney like Gregory J. Spadea before signing the marital settlement agreement. You can reach him at the Law Offices of Spadea & Associates, LLC in Ridley Park at 610-521-0604.

When Can I Deduct Alimony Ordered Prior to December 31, 2018

When divorce occurs, one ex-spouse is often obligated to make continuing payments to the other spouse. However for the payments to be deducted by the payer, they must meet the tax-law definition of alimony. For any particular payment to qualify as deductible alimony for federal income tax purposes and meet the tax law definition of alimony, all the following requirements must be met:
1. The payment must be made pursuant to a written divorce decree or separation agreement such as a temporary support order. Note that payments made in advance of signing a written divorce or separation agreement or before the effective date of a court order or decree cannot be deductible alimony. Such payments are considered voluntary and are therefore nondeductible. The same is true for payment of amounts in excess of what is required under a written divorce decree or separation agreement.

2. The payment must be to or on behalf of a spouse or ex-spouse. Therefore, Payments to third parties, such as attorneys and mortgage companies, are okay if made on behalf of a spouse or ex-spouse and pursuant to a divorce decree or separation agreement.

3. The divorce decree or separation agreement must state the payments are alimony.

4. After divorce or legal separation (meaning the couple is considered divorced for federal income tax purposes), the ex-spouses cannot live in the same household or file a joint return for the year they separated or thereafter.

5. The payment must be made in cash or cash equivalent such as check or money order.

6. The payment cannot be fixed or deemed child support in the divorce decree.

Fixed child support simply refers to amounts designated as such in the divorce or separation agreement,

so it’s easy to identify. Payments are considered to be deemed child support if they are terminated or reduced by any of the following so-called contingencies relating to a child:

a. Attaining the age 18, or the local age of majority.
b. Death.
c. Marriage.
d. Completion of schooling.
e. Leaving the ex-spouse’s household.
f. Attaining a specified income level.

7. The payer’s return is required to include the recipient’s social security number.

8. The obligation to make payments (other than payment of delinquent amounts) must cease if the recipient party dies. If the divorce decree is unclear about whether or not payments must continue, state law controls. If under state law, the payer must continue to make payments after the recipient’s death, the payments cannot be alimony. Therefore, to avoid problems, the divorce decree should always explicitly stipulate whether a payment obligation continues to exist after the death of the recipient party. Failing this test is probably the most common cause for lost alimony deductions.

9. There is also an IRS rule that states if alimony payments decrease by more than
$15,000 per year between years 1 and 2, or years 2 and 3, then part of the payments will not qualify for a tax deduction to the payor (and hence will not be taxable to the payee.) In other words, if alimony payments total more than $15,000 per year then they must last more than one year and cannot be reduced too quickly. The reason for this is because the IRS sees this as a property settlement, not alimony. Because of this rule replacing all monthly payments with a lump sum “alimony” payment that is paid all in one year will often cause a trigger of this recapture rule, since alimony will go down to $0 in year 2.

Keep in mind the Tax Cuts Jobs Act repealed the deduction for alimony paid and the corresponding inclusion of alimony in income by the recipient. The provision is effective for any divorce or separation agreement executed after December 31, 2018, or for any divorce or separation agreement executed on or before December 31, 2018, and modified after that date, if the modification expressly provides that the amendments made by this provision apply to such modification. Thus, alimony paid under a separation agreement entered into prior to the effective date is generally grandfathered.

It is very important to consult a tax attorney like Gregory J. Spadea before signing the marital settlement agreement. You can reach him at the Law Offices of Spadea & Associates, LLC in Ridley Park at 610-521-0604.

The 17 Factors of Alimony in PA

The following factors will be considered by the Master or Judge in determining alimony:

  • 1. The relative earnings of both spouses.
  • 2. The duration of the marriage.
  • 3. The ages and physical, mental and emotional states of the two spouses.
  • 4. The sources of income of both spouses. This includes medical, retirement, insurance or other benefits.
  • 5. The expected future earnings and inheritances of the two spouses.
  • 6. The degree to which one spouse has contributed to the other spouse’s education, training or increased earning potential.
  • 7. The degree to which a spouse will be financially affected by their position as the custodian of a minor child.
  • 8. The standard of living of the spouses established during the marriage.
  • 9. The relative education of the parties. This also considers the amount of time it would take for the spouse seeking alimony to acquire the education or training necessary to find employment.
  • 10. The relative assets and liabilities of the two spouses.
  • 11. The property each spouse brought to the marriage.
  • 12. The degree a spouse contributed as a homemaker.
  • 13. The relative needs of the two spouses.
  • 14. The marital misconduct of either of the spouses during the marriage. “Abuse” as in this context shall have the meaning given to it under Section 6102.
  • 15. The federal, state and local tax consequences of the alimony.
  • 16. Whether the spouse seeking alimony lacks sufficient property, including items in Chapter 35 relating to property rights, to provide for their reasonable needs.
  • 17. Whether the spouse seeking alimony is incapable of supporting themselves through appropriate employment.

My clients often ask the following questions regarding alimony:
1) How long do you have to be married to receive alimony in PA?
Length of the marriage, albeit an important factor in the alimony statute, is but one of the 17 factors to be considered by the court. Typically, the longer the marriage, the greater the case for alimony, assuming other relevant factors also exist. However, there is no minimum length of time that a spouse has to be married in order for alimony to apply.
2) How long do I have to pay alimony in PA?
Again, there is no set time period for paying alimony in PA as it is purely discretionary. To be sure, if an alimony payment is going to apply, spouses should carefully evaluate their particular circumstances, what the recipient’s future financial needs will be and also what the payor’s ability to pay is.
For example, a common type of alimony in PA is called “rehabilitative alimony” where one spouse may only need a few years of financial assistance after the divorce to get back on their feet financially, clear their existing debt or perhaps retrain themselves for a new career in a different field. If such a need is recognized, then the alimony payment should only last for a limited period of time (and no more) in order to satisfy this purpose.
3) Am I entitled to one year of alimony for every three years of marriage?
This is often a common misconception by those who are navigating the murky waters of alimony in a PA divorce. In many PA county courts, there is an unspoken rule of thumb, not a law, that a recipient should receive one year of alimony for every three years of marriage. However, I always tell my clients that this is not a slam dunk for an alimony claim. First, the court must determine that the matter is appropriate for alimony. Then, the 1 to 3 year alimony presumption is merely a starting point for negotiation and argument before the court or divorce master. From there, the ultimate determination could either be more or less than this presumption.
4) Is there a formula that applies to calculate post-divorce alimony in PA?
There is no formula to calculate post-divorce alimony in PA. Again, it is a purely discretionary issue with the court. By contrast, when spouses decide to mediate their divorce, they themselves have the opportunity to control what alimony, if any, will apply. This is achieved most fairly when they each prepare their post-divorce budget of expenses so that they can evaluate what is needed for the recipient in order to reasonably live in their separate household and what the payor can afford.

If you have a question about alimony please call Gregory J. Spadea at 610-521-0604 of Law Offices of Spadea & Associates, LLC.

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