The Tax Cuts and Jobs Act (TCJA) has made some changes that directly affect those who are planning on getting a divorce. With the new TCJA changes, alimony will no longer be tax deductible or taxable. These changes apply to divorce and separation cases fully executed after December 31, 2018 and adjusted agreements changed on January 1, 2019 and after. These changes, unlike most of the other TCJA revisions, are a permanent part of the tax code and will continue to be effective after 2025.
To fully understand the changes that have been made, it is best to understand the previous set of rules. Before these changes were made, those who paid alimony to an ex-spouse were able to write off the entirety of qualified alimony payments on their federal returns, and recipients of alimony were required to report their alimony received as taxable income. However, child support payments among other types of payments were not tax deductible or taxable for either party.
Alimony that qualified as deductible had the following requirements:
• The parties involved could not file jointly with each other
• The payments were made in cash/check/money order
• The payment to the spouse or former spouse is regulated by a divorce or separation document/instrument
• The divorce or separation document does not specify that the payment is not alimony
• If the spouses are legally separated under a decree of divorce or separate maintenance, the spouses are not living in the same household when the payment is made
• The payments are not required to continue once the recipient passes away.
• The payment is not considered child support or property settlement.
Now that the TCJA changes are in effect, none of the previously listed requirements can make alimony deductible. Agreements finalized after December 31, 2018 and preexisting agreements edited on or after January 1, 2019 are affected by these changes. It is important to know that in some states there is a waiting period after divorce paperwork is finalized before the divorce officially takes effect. This waiting period determines the date of which a divorce or separation is official and what tax rules apply to it. In New Jersey, the wait period in a no-fault divorce is six months if both parties consent to it and 18 months if they do not, meaning that in a consenting no fault divorce, papers would need to be signed in late May or early June to guarantee that it would be finalized before December 31st 2018 and qualify to reap benefits under the old tax code.
These changes in the tax code will likely effect the way people go about renegotiating a divorce agreement. Since the payor will no longer be able to deduct alimony, they may not be willing to pay very much, but instead might agree to a lump-sum payment before 2019 so that the full sum would be deductible. The payee, on the other hand, may attempt to stall the process so that they can avoid being taxed on the alimony.
Additionally, it is to be expected that many people will revisit their preexisting agreements in light of these changes effective January 1, 2019. For example, if an agreement was made based on the fact that the payor could fully deduct alimony, it is likely that a current divorce decree will be revisited and edited now that alimony payments will no longer be deductible. To ensure that these revisions to current alimony agreements beat the end of year deadline, the adjustments must be made before January 1, 2019 with any wait time taken into account.
Another important Tax Cuts and Jobs Act (TCJA) enactment effective immediately is the documentation now required for charitable contributions. The deduction limitation for cash contributions to public charities and some private foundations has increased from 50% to 60%. Contributions over 60% can be carried forward and deducted for up to five years based on the later year’s ceiling. However, the IRS is cracking down and getting stricter with charitable donation record keeping. Be sure to always keep proof and/or records of your charitable contributions, on the organizations letterhead if possible.
As of the latest IRS regulations set forth on 7/30/18, the following documentation is mandated:
• No chartable monetary gift is eligible for deduction unless the donor maintains records of the gift such as bank records or a written communication from the donee with the name of the donee, the date of contribution and the amount of the contribution, regardless of the amount of the donation.
– You can deduct travel costs if you are traveling to provide service as long as you are not compensated for it.
– You can deduct gifts that you receive a benefit from, but only the amount of the donation after the benefit is subtracted.
— EX: If you buy a charity dinner ticket for $50 dollars and the dinner is valued at $20, you can only deduct $30.
• Nonmonetary or property donations under $250 may be claimed for deduction only if the donor receives a receipt from the donee or keeps reliable records.
• If the contribution is at least $250 but less than $500, a contemporaneous written acknowledgment is required.
• For a donation that exceeds $500 but is no more than $5,000 the donor must have written acknowledgement and a completed Form 8283 (Section A) Noncash Charitable Contributions must be attached to the tax return.
• For Noncash contributions of $5,000 or more, in addition to a written acknowledgement the donor must have their contribution appraised by a qualified appraiser and complete and file either Section A or Section B of Form 8283.
• Noncash contributions of $500,000 or more require the same proof as a $5,000 or greater contribution and the qualified appraisal must be attached to the tax return.
– A qualified appraiser is an individual with a verified education and experience in valuating that item or property in question.
— A verifiable education means that the individual has successfully completed professional or college level coursework in evaluating the type of property and has two or more years of experience in valuating that kind of property or has earned a recognized appraiser designation.
— The new requirements for the appraisers apply only to contributions made on or after 1/1/19. All other new requirements are in effect as of 7/30/18.
We at Mazur and Associates know that separation and divorce is hard enough on everyone involved and that financial and tax planning is just an added stress. Also, the revised documentation for charitable contributions is more stringent beginning with 2018 tax returns. Let us help you get through it with as much confidence as possible. Call us and set up an appointment to discuss your options at (732) 936-1230!