Thanks to the 2017 federal Tax Cuts and Jobs Act of 2017, (“TCAJA”), divorce lawyers and mediators know that December will be a busy time and some of us may be working right up to the close of the courthouse on Monday, December 31st. Under the TCAJA the alimony exclusion has been repealed for all separation agreements executed after this December (technically you could say the alimony exclusion is suspended, because the TCAJA repeal expires on December 31, 2025). We can only imagine the conversations we will be having in December with clients who call us looking for a divorce and learn they have less than a month to write a separation agreement if they want to preserve the ability of the payor of alimony to exclude the payments from his or her taxable income. This article prescribes aspirin and a possible solution.
What if we could write a simple “placeholder” Separation Agreement to be executed before the end of this December, wherein one or both spouses agree to pay a defined amount a month to the other as alimony subject to an agreement of modification which defines all the terms of their divorce, including the alimony agreement, in a Separation Agreement to be filed in court in 2019 for approval? How can this be?
Section 11051 of the TCAJA reads in its entirety as follows: “(c) EFFECTIVE DATE.—The amendments made by this section shall apply to (1) any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 2018, and (2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.”
A divorce or separation instrument is defined as “(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree, (B) a written separation agreement, or (C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.” Since Section 11051 states that any divorce or separation instrument executed before December 31, 2018 is not affected by TCAJA and such an Agreement may be modified after that date, all that is needed is the signed Separation Agreement.
So the clear language of TCAJA does not require court approval or a divorce filing in court before December 31, 2018 if you have a written separation agreement that preserves the alimony exclusion. This step appears to satisfy the federal statute and gives the clients time to work out a sensible Separation Agreement without ruining their holidays or yours. Based on this analysis I will be suggesting to my mediating clients Bill and Sally that if they want to have taxable and excludable alimony in their Agreement they consider writing a simple divorce or separation instrument and execute it before the end of December, 2018. A divorce instrument which contains the following sentence should be sufficient to satisfy the requirement of the TCAJA:
“SEPARATION AGREEMENT UNDER TCAJA SECTION 11051
On or before the first day of each month after the date of this Agreement Bill shall pay Sally one third of the difference in our incomes during the prior calendar year or $10.00, whichever is greater. Such payment shall be considered alimony excludable by him and taxable to her for federal and state income tax purposes. Such obligation shall terminate upon the first to occur of the death or legal remarriage of Sally or …(a date specified in accordance with Mass. G.L. c. 208 section 53). If we do not have the time or readiness to provide any further provisions in our Separation Agreement before December 31, 2018 we shall modify this Agreement as soon as we agree on such terms and provisions after January 1, 2019 and until such modification this Separation Agreement shall remain in full force and in effect.”
Dear reader, you should feel free to adapt and improve upon this language as you wish, and sleep better knowing that your clients need not take away any remaining holiday spirit and activities in order to rush to sign much more than this simple paragraph before the end of 2018.