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.

Qualifying for the Family-Owned Business Exemption from Pennsylvania Inheritance Tax

Beginning July 1, 2013, the transfer at death of certain family owned business interests are exempt from the Pennsylvania inheritance tax. Pennsylvania Inheritance Tax is currently 4.5% for linear descendants, 12% for siblings and 15% for everyone else. To qualify for the family-owned business exemption, a family-owned business interest must:

  1. Have been in existence for five years prior to the decedent’s death;
  2. Have less than 50 full time equivalent employees and a net book value of assets totaling less than $5,000,000 at the date of the decedent’s death;
  3. Be engaged in a trade or business, the principal purpose of which is not the management of investments or income producing assets;
  4. Be transferred to one or more qualified transferees – the decedent’s husband or wife, grandfather, grandmother, father, mother, or children, siblings or their children. Children include natural children, adopted children; and stepchildren;
  5. Owned by a qualified transferee for a minimum of seven years after the decedent’s death;
  6. Reported on a timely filed Pennsylvania inheritance tax return and filed within 9 months of the decedents date of death, or within 15 months of the decedent’s date of death if the estate or person required to file the return was granted the six month statutory extension.

The transferee must file an annual certification and notify the Pennsylvania Department of Revenue within thirty days of any transaction or occurrence causing the qualified family-owned business to fail to qualify for the exemption. Failure to comply with the certification or notification requirements results in a total loss of the exemption.

If you feel you qualify for the family-owned business exemption please contact Gregory J. Spadea online or at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

What Happens to Your Debts When You Die?

When you die, your executor has responsibility to pay all your remaining debts if your estate has enough probate assets to pay them. Probate assets are assets that were in your name alone and pass by your will. Before your executor pays any creditors he or she must first pay the estate administration expenses such as funeral costs, grave marker, probate fees, medical bills, attorney fees and rent for the previous six months prior to your death. After the administrative expenses are paid, the secured creditors are paid and any probate assets remaining will go to pay unsecured creditors.

If the estate is not solvent, and a creditor is paid more than he is entitled to receive, the executor can be held personally responsible to the extent of the overpayment. The executor also may be personally liable if he or she distributes estate property without having given proper notice to those having a claim against the estate.

As a general rule, debt collectors may not try to collect from your heirs. However, there are several exceptions. The first exception is if an heir was a co-signer of a particular debt in which case they would be responsible for that debt or if someone held property jointly with you, they would be responsible for any debts on the joint property. The third exception is if an heir inherits a car or a boat that had an outstanding loan, they would have to pay the loan off or the car or boat would be repossessed by the lender.

Creditors cannot be paid from any assets that pass directly to a beneficiary. Assets that pass directly to a beneficiary are called non-probate assets and include jointly owned bank accounts and any account or life insurance policy with a named beneficiary. Therefore a jointly held bank account would pass directly to the joint owner, and the funds in that account could not be used to pay creditors. Similarly, life insurance policies pass directly to the beneficiaries, so creditors do not have access to those funds. In addition creditors cannot access funds held in an irrevocable trust.

A debt collector may not contact your heirs or relatives to try to collect payment unless they were co-signers of the debt or the debt was a jointly owned debt. Debt collectors are allowed to contact the executor of your estate, or your spouse, or your parents if you were a minor, to discuss the debts but may not discuss the debts with anyone else.

Contact Gregory J. Spadea

If you have any questions or need help probating an estate please contact Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

When Can I Deduct Alimony on my Federal Tax Return?

Tax return paper
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 instrument such as a temporary support order.
Note that payments made in advance of signing a written divorce or separation instrument 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 instrument.

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 instrument.

3. The divorce decree or separation instrument 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 instrument, 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.

What happens when payments to an ex-spouse fail to meet the tax-law definition of alimony? They are generally treated as either child support payments or as payments to divide the marital property (equitable distribution). Both types of payments are nondeductible personal expenses for the payer and tax-free income for the recipient.

Since payments to ex-spouses are often substantial, the issue of whether the payer can deduct them is often substantial too. Therefore, it is very important to consult a tax attorney like Gregory J. Spadea before signing the divorce decree. You can reach him at Spadea & Associates, LLC in Ridley Park at 610-521-0604.

What I Need To Know To File For Divorce In Pennsylvania

Divorce definition in dictionary
Deciding to file for a divorce can be a long and emotional process that affects you and those around you. Below is some preliminary information to consider.

1. If you have decided to file for divorce in Pennsylvania, you must first determine if you meet the jurisdiction requirement for Pennsylvania.

If you or your spouse have been living in Pennsylvania for more than six months, you may file for divorce in Pennsylvania. The county you file in can be the county your spouse lives in. If your spouse no longer lives in Pennsylvania, you may file in the county you live in.

Determine the grounds for divorce

a. No-fault. The court may decree a divorce where there is mutual consent and it is alleged that the marriage is irretrievably broken or when the marriage is irretrievably broken and an affidavit has been filed alleging that the parties have lived separate and apart for a period of at least two years.

b. Fault. Committed willful and malicious desertion period of at least one year; adultery; by cruel and barbarous treatment, endangered the life or health of the injured and innocent spouse; bigamy; incarceration for at least 2 years; offered such indignities to the innocent and injured spouse as to render that spouse’s condition intolerable and life burdensome

2. Locate all documents and family records

a. Birth certificates of children
b. Financial records
c. Pay stubs
d. Mortgage note
e. Documents for investment properties
f. Titles to automobiles
g. Bank statements
h. Insurance policies
i. Most recent credit card statements

3. When going through a divorce, you want to remember that your words and actions will be looked at under a microscope. Therefore, although it is emotional, you want to be mindful of your behavior at all times in a public setting, at home in front of family members and when using any form of social media. All of this will be taken into consideration in court.

4. Custody. There are two main forms of custody. Legal and physical.

a. Legal custody gives the custodian the right to make decisions about the child including medical and educational.

b. Physical custody is the physical possession of the minor child. This is generally the individual who the child lives with.

5. In any divorce proceeding, one must remember that property will be divided. Write down a list of items that you want to keep and those that you are willing to compromise.

There is simply too much at stake in a divorce proceeding to go through the process without an attorney to help guide you through the legal system. Feel free to contact David W. Edelman at Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604.

What is Spousal Support and or Child Support and How Much Do I Need To Pay?

Writing A Check
Divorce/Separation and Spousal Support:  There are three types of spousal support.  The first two are support and alimony pendent lite (APL).  The third is alimony.

Spousal support obligation arises out of the marriage relationship.  Support may be awarded prior to the commencement of divorce proceedings and during the separation/estranged phase.  Alimony pendent lite (APL) can only be awarded after the commencement of divorce proceedings but prior to a divorce decree.  The main difference between the two is the timing of the filing for divorce and the defenses that may be claimed.  Generally there are no defenses to a claim for APL while a person may have a defense precluding a spouse from asserting the need for spousal support.  Defenses that may be asserted as grounds for divorce are also defenses to spousal support such as adultery and cruel and barbarous treatment.  Therefore, a spouse that has committed adultery may not be entitled to receive support during the separation phase but could quite possible receive APL once the divorce action is filed.

Spousal support and APL are calculated the same.  The formula takes into consideration the Obligor’s net monthly income minus support payments obligor may have as result of other dependents or former spouses minus child support payments from current litigation minus obligee’s net monthly income multiplied by thirty (30%) percent.  If the parties have no children or child support orders the number would be multiplied by forty (40%) percent.  This formula has been adjusted to require the court to consider the length of marriage in determining its award.  The primary purpose of this provision is to prevent the unfairness that arises in a short-term marriage when the obligor is required to pay support over a substantially longer period of time than the parties were married and there is little or no opportunity for credit for these payments at the time of equitable distribution.

The third type of support is alimony.  The purpose of alimony is to effect economic justice, but it is a secondary remedy and applies only if economic justice cannot be achieved by way of equitable distribution.  This type of an award is rendered post divorce decree to achieve such justice.  There is no formula Pennsylvania courts use to assist in its award.  Rather courts will rely on the seventeen subjective factors listed in 23 Pa. C.S.A. § 3701 (b).  Some of those factors are: length of the marriage; the ages and physical, mental and emotional conditions of the parties; sources of income of the parties; earning capacities of the parties; the earning powers of the parties and the relative needs of the parties.

Child Support: These are payments due to the support of the child regardless of marital status.  Pursuant to federal law, The Family Support Act of 1988 (P. L. 100-485, 102 Stat. 2343 (1988), requires all states to have statewide child support guidelines.

The guidelines take into consideration the parents’ net monthly income.  Once that figure has been determined the guidelines state what the support payments are monthly.  The total payments increase with each child.  The parties are responsible for that suggested guideline figure.  That total figure will be divided according to the percentage of time the child is with their respective parent.  These figures can also be reduced if there are any ongoing support obligations.  Any deviations are based upon a case by case basis.

If you have any questions or need a divorce attorney contact Spadea & Associates, LLC at 610-521-0604.   We suggest you bring your W-2 and last three pay stubs when you come for you free consultation.

What are the Grounds for Divorce in Pennsylvania?

Picture of a family being cut in half
The Complaint for Divorce is the initial document filed with the Pennsylvania court requesting the court to terminate the marriage under certain specified grounds.

No-Fault Based Grounds:  The court may decree a divorce where there is mutual consent and it is alleged that the marriage is irretrievably broken or when the marriage is irretrievably broken and an affidavit has been filed alleging that the parties have lived separate and apart for a period of at least two years.

Fault Based Grounds:  Committed willful and malicious desertion period of at least one year; adultery; by cruel and barbarous treatment, endangered the life or health of the injured and innocent spouse; bigamy; incarceration for at least 2 years; offered such indignities to the innocent and injured spouse as to render that spouse’s condition intolerable and life burdensome.

In Pennsylvania, the property and debt issues are typically settled between the parties by a signed Marital Settlement Agreement or the property award is actually ordered and decreed by the Court.  Pennsylvania is referred to as an “equitable distribution” state. When the parties are unable to reach a settlement, the parties will go through a discovery process to classify which property and debt is to be considered marital. Next, a monetary value needs to be assigned on the marital property and debt.  Lastly, the Court will distribute the marital assets between the two parties in an equitable fashion. Equitable does not mean equal, but rather what is deemed by the Court of Common Pleas to be fair.

If either spouse files for support, the court will consider the following: the earning potential and earning capacities of the parties; the ages and health condition of the parties; the income of the parties; the expectancies and inheritances of the parties; the length of the marriage; the contribution by one party to the earning capacity of the other; the extent to which the earning power, expenses or financial obligations of a party will be affected by reason of serving as the custodian of a minor child; the standard of living of the parties established while married; the relative education of the parties and the time necessary to acquire sufficient education or training to enable the party seeking alimony to find appropriate employment; the relative assets and liabilities of the parties; any pre-marital property; the contribution of a spouse as homemaker; the relative needs of the parties; any marital misconduct or fault; tax consequences; whether the party seeking alimony lacks sufficient property; and whether the party seeking alimony is incapable of self-support through appropriate employment.

Either or both parents may be ordered to provide child support according to their ability to pay. The factors for consideration set out by statute are: the net income of the parents; the earning capacity of the parents; the assets of the parents; any unusual needs of the child or the parents; and any extraordinary expenses. Child support payments may be ordered to be paid through the Domestic Relations Section of the court. There are official child support guidelines that the Court will take into consideration in determining the support to be paid.

Contact a Ridley Park, PA Divorce Attorney

Please contact Spadea & Associates, LLC at 610-521-0604 if you need help filing for divorce or custody.

© 2018 The Law Offices of Spadea & Associates. All Rights Reserved. Sitemap | Disclaimer | Privacy Policy Concept, design, and hosting by GetLegal.com Website Services