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.

Identifying Marital Versus Non-Marital Property in Pennsylvania

Each spouse should make a list identifying all assets that they own together or separately. Assets include tangible items, such as real estate, businesses, cars, boats, jewelry, furniture, and collectibles. They also can include non-tangible items, such as bank accounts, stock options, trusts, life insurance policies, patents, copyrights, retirement plans, and profit-sharing plans.

Next, you need to “characterize” or describe each asset as either “marital” or “non-marital.” An asset’s character plays an essential role in the process of dividing and determining the value of property in divorce. Generally speaking, “marital property” in Pennsylvania includes all assets acquired by either spouse during the marriage which includes anytime between the date of the marriage and the date of separation.

“Non-marital” assets also referred to as “separate property” include the following:

  • Assets acquired by either spouse before marriage
  • Assets acquired by gift or inheritance at any time (except for gifts from one spouse to the other that occurred during marriage), and
  • Assets acquired by either spouse after the date of separation.

Generally speaking, courts have the authority to divide and distribute marital property between the spouses in a divorce, but spouses typically get to keep their separate property.

The date of separation is crucial in characterizing property, because property obtained after the date of separation is generally non-marital.

In Pennsylvania, a couple is separated when they begin to live “separate and apart.” This means that the spouses no longer have sexual relations with one another, and they don’t hold themselves out to the world as a married couple. Spouses don’t necessarily have to live in different households to be separated, but that type of separation may be a little more difficult to prove.

Once you’ve determined the date of separation, you’ll need to determine when assets were purchased. Assets acquired before marriage are separate property. For example, if one spouse owned a car before the marriage, the car belongs to that spouse separately through the marriage and after divorce. In addition, assets purchased after the date of separation are generally considered separate, unless a spouse used marital funds to obtain that asset. If so, it will be considered marital, and valued as part of the marital estate.

Next, you’ll need to find out what each asset is worth. Generally, courts use current value. For example, the current value of a bank account is the balance on the most recent statement. For assets such as homes and cars, courts use current “fair market value,” which means the amount the asset is worth if it were sold to an unrelated third party. This can be determined by looking at recent sales of comparable assets. For assets that are harder to value, like collectibles, you may need to hire an appraiser.

Although an asset acquired before marriage is considered separate property, it may have a marital part or value to it. For example, if one spouse owned an expensive piece of art before the marriage, the artwork itself belongs to that spouse. However, the increase in value of the artwork during the marriage is considered part of the marital estate. To compute the marital value of the artwork, you would start with the value of the piece on the date of separation, and subtract its value as of the date of marriage.

In addition, marital assets may have a separate property component that must be computed before knowing the true marital value. For instance, if one spouse established a retirement plan during the marriage, but continued to make contributions after the date of separation, the plan has now become “co-mingled,” which means it’s made up of both marital and non-marital property.

To figure out the marital value of the co-mingled plan, you would generally deduct the separate property contributions from the current value, taking into account any interest that may have accrued.

If you’re not sure how to value a retirement plan, you may need to hire an expert, such as an actuary who can figure it out.

Finally, even though courts won’t divide separate assets in a divorce, courts can consider their values when deciding how to divide marital property. For example, if one spouse inherited a large amount of money, the court may consider those separate property resources when deciding how to divvy up the marital estate.

If you have any questions about marital assets in Pennsylvania, call Gregory J. Spadea at 610-521-0604 of the Law Offices of Spadea & Associates, LLC

How Pennsylvania Courts Divide Marital Property During Divorce

Divorcing couples may agree on how to divide their marital property themselves. In Pennsylvania, spouses can enter into a “property settlement agreement” (PSA) that memorializes their agreed-upon terms. Couples then submit their PSA to the court, so it can be incorporated into their final divorce decree.

If spouses can’t agree, they’ll end up in court, where a judge will decide. If spouses have a valid prenuptial agreement that addresses the division of property in the event of divorce, courts will follow the terms of the prenuptial agreement.

If there is marital property not covered by the prenuptial agreement, or if there is no valid prenuptial agreement, the court will divide marital property by “equitable distribution.” This means the court will order a division it believes is equitable or fair to both parties but not necessarily equal.

Pennsylvania courts consider several factors when determining equitable distribution, including:

  • The length of the marriage;
  • Whether either spouse has been married previously;
  • Each spouse’s age, health, education, amount of income, and sources of income including disability, retirement, insurance or other benefits;
  • Each spouse’s vocational skills and ability to be employed;
  • The assets, debts, and needs of each spouse;
  • Any contributions by one spouse to the other’s education, training, or earning ability. For example, if one spouse provided financial support or cared for the couple’s children so the other spouse could obtain an education;
  • The future ability of each spouse to earn income and obtain assets;
  • Each spouse’s contribution to the acquisition of marital assets or to preserving or increasing the value of marital assets (including contributions as a homemaker);
  • Any reduction in the value of marital assets caused by either spouse;
  • The amount or value of non-marital assets owned by each spouse;
  • The standard of living the couple enjoyed during the marriage;
  • The financial impact any proposed property division will have on each spouse such as the tax implications, and the expense of sale/transfer/liquidation of property; and
  • Whether either spouse will be the custodian of any dependent children under the age of 18.

In Pennsylvania, courts do not consider marital misconduct, such as adultery, when dividing property, unless the misconduct had a financial impact on marital property. For example, if one spouse emptied a marital bank account buying gifts for a lover during the marriage and without the other spouse’s consent, a court may reduce the percentage the “offending” spouse gets from the marital estate to compensate for the unauthorized spending.

Debts must be divided in divorce as well. You’ll need to identify, characterize, and value all debts. Be sure to make a list, and consider all credit card debts, loans, mortgages, promissory notes, and liens.

Debts are characterized and valued similar to assets, but there are some differences. Debts incurred during marriage are generally considered marital debts, unless a spouse can show that it’s reasonable to assign the debt exclusively to the other spouse.

Debts incurred before marriage are generally “separate” and assigned to the spouse who incurred them, unless the couple jointly incurred the debt before marriage. In addition, if a debt was incurred before marriage for a marital purpose e.g., loan for wedding costs, there is a chance a court would characterize it as marital. Thus, the balance of premarital debts is generally irrelevant, except to show the amount of indebtedness one spouse has. Debts incurred after separation are treated in the same manner.

If you have any questions about Pennsylvania marital property or debts call Gregory J. Spadea at 610-521-0604 of the Law Offices of Spadea & Associates, LLC.

What Is A Marital Asset in Pennsylvania?

Pennsylvania is an equitable distribution state when it comes to splitting up marital assets in a divorce. Equitable distribution does not mean a 50-50 split but, rather, it mandates a fair division of marital property. Marital property includes joint assets and joint debts. A marital asset is defined by statute 23 Pa.C.S.§3501(a) as “all property acquired by either party during the marriage and the increase in value of any non-marital property”. Marital property includes all property acquired even if it is only held in one partner’s name. The same holds true in regard to marital debt; just because the debt is in one partner’s name does not mean it is not marital debt.

Marital assets are acquired during the marriage, starting with the date of marriage and up until the “date of separation.” There is no formal “legal separation” in Pennsylvania, although the concept of a date of separation is important for a number of reasons. The date of separation can be difficult to pinpoint but it is the idea that parties are separated when they are no longer holding themselves out to the world as spouses. This might be when they no longer live together, when they separate their finances, or when one party has initiated a divorce action. There are a number of exceptions under the Divorce Code as to what is considered a marital asset, even though the property might be acquired during the marriage, such as inheritances or property acquired by gift.

Equitable distribution is not always clean cut. It requires a careful examination of all of the facts of a particular case, and an application of the large body of statutory and case law surrounding the issue. It is not uncommon, for instance, that one party has purchased a residence prior to marriage. In equitable distribution of the marital estate, the spouse that owned the residence may be entitled to claim the value of the equity in the home that was built up prior to the marriage. Some counties deal with this by utilizing a “vanishing credit,” where the spouse who owned the property prior to marriage gets a higher percentage of the pre-marriage value back in the equitable distribution if the marriage is of relatively short duration. The rights of the spouse who brought the house into the marriage must be balanced against the rights of the spouse that moved into the residence during the marriage. If the home increased in value during the marriage, that increase is marital property subject to equitable distribution. The same concepts apply to retirement accounts and pensions. There will typically be a marital portion of the asset, and a non-marital portion which should be returned to the participant spouse.

The Pennsylvania Supreme Court recently decided on a 2011 case involving the treatment of a particular type of asset, a monetary settlement from an accident, in the case of Focht v. Focht. In that case, the husband was injured in an accident during the marriage. The husband and wife retained an attorney and eventually were successful in their personal injury lawsuit. However before the lawsuit ended and the settlement money was paid, the parties separated and filed for divorce. The question the Focht case examined and answered relates to all property that is received after a date of separation but “accrued” during the marriage. The Court specifically examined 23 Pa.C.S.§3501(a)(8), which provides that marital property does not include “any payment received as a result of an award or settlement for any cause of action or claim which accrued prior to the marriage or after the date of final separation regardless of when the payment was received.” The Focht Court ruled that because the cause of action accrued during the marriage, before the parties’ final separation, proceeds from the settlement of the suit were marital property. The marital property exception set forth in §3501(a)(8) did not apply, and it was irrelevant that the parties had finally separated by the time the suit settled and the settlement award was paid. Therefore, if a cause of action accrues after the date of marriage and before the date of separation, then any settlement proceeds resolving that cause of action are marital property regardless of when that settlement occurs.

If you have any questions about marital assets or equitable distribution in Pennsylvania, call Gregory J. Spadea of the Law Offices of Spadea & Associates, LLC at 610-521-0604.

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