Page 61 - Family Law Services

Chapter 8

Divorce and Taxes

In many respects, divorce is a financial transaction and, like many financial transactions, taxes can be a
significant consideration. Tax planning for a divorcing couple is an important aspect of a family law
practice and should be fully considered during an engagement. A thorough understanding of the sections
of the Internal Revenue Code (IRC) and case law pertaining to family law is necessary to best serve the
client and avoid tax traps throughout the divorce process. The maximization of tax benefits and savings
throughout the divorce process may be helpful in settling the financial aspects of the case.

2017 Tax Cuts and Jobs Act

On December 22, 2017, the most sweeping tax law legislation since 1986 was signed into law. The 2017
Tax Cuts and Jobs Act ("TCJA") had a significant impact on the financial considerations in divorce. Ar-
eas impacted the most include spousal support, tax filing status and dependency exemptions/child tax
credits, itemized deduction changes and 529 qualified tuition programs.

Spousal Support (Alimony)

Divorce orders and marital settlement agreements have often resulted in one spouse making support
payments to the other. Those payments may be either in the form of spousal support (alimony) or sup-
port for the unemancipated children of the marriage (child support). Spousal support may be either per-
manent, for a fixed duration, or for a temporary period during the divorce proceedings. Prior to 2018, the
alimony payments made in accordance with IRC Section 71 were deductible by the payer and includible
in income to the recipient (see below discussion of IRC Section 71). For divorce agreements signed Jan-
uary 1, 2019, and after, the alimony deduction and income inclusion are eliminated. Alimony is no long-
er burdened by the rules aimed to prevent it from being a disguised form of child support or tax free
transfer. Parties are free to craft an agreement so long as it complies with state law for child support.
Child support payments are neither deductible by the payor nor taxable to the recipient.

One challenge that is facing practitioners and judges is adjusting the alimony, which traditionally "in-
cluded" a consideration for its taxability, to a tax-free amount. We would expect to see alimony pay-
ments adjust downward accordingly. This is important for us as consultants to work with attorneys in
computing alimony going forward.

It is important to note that divorce agreements signed prior to January 1, 2019, are under the tax law in
effect at the signing of the agreement. However, if there is a modification made after January 1, 2019, to
a prior agreement, the modification must state that the prior tax treatment remains in effect. The agree-
ment cannot be silent on this point or the tax treatment will default to TCJA.

Child Support

Child support is the term given to payments required to be made by one spouse to the other for the fi-
nancial support of minor or unemancipated children. Child support is both a moral and legal obligation
of the parent beginning at the child’s birth through the date of his or her emancipation. The age of eman-
cipation is measured differently in each state but generally relates to the child reaching the age of major-
ity, graduating high school or college, entrance into the military, or the marriage of the child.

© 2020 Association of International Certified Professional Accountants 59