I recently hosted several seminars as part of the firm’s divorce seminar series regarding the effects of the new Tax Cuts and Jobs Act (TCJA) on divorcing couples alongside my colleague, Richard Wolf. At these seminars, several questions were raised.
Under the current law, alimony is considered income for IRA contribution purposes. However, under the TCJA and as of 2019, alimony will no longer be taxable income for the alimony recipient. This raises the question of whether IRA contributions can still be made based on alimony income. For some taxpayers, alimony could be the main or only source of income.
The current version of IRS Pub 590-A, which has not been updated, states, “For IRA purposes compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.” Per this guidance, compensation for IRA purposes includes taxable alimony. Untaxed alimony would not qualify.
In a Thomson Reuters Checkpoint article analyzing the TCJA, Thomson Reuters reported that:
“Under the House bill (became final version), alimony and separate maintenance payments are not deductible by the payor spouse. The House bill repeals the Code provisions that specify that alimony and separate maintenance payments are included in income. Thus, the intent of the provision is to follow the rule of the United States Supreme Court's holding in Gould v. Gould, in which the Court held that such payments are not income to the recipient. Income used for alimony payments is taxed at the rates applicable to the payor spouse rather than the recipient spouse. The treatment of child support is not changed.”
Per the Gould case mentioned above, alimony is not income to the alimony recipient. An IRA contribution is based on a taxpayer’s income. Therefore, it appears that under the TCJA, IRA contributions can no longer be made based on alimony. The current thinking is that unless Congress specifically addresses IRAs and alimony, IRA contributions will no longer be allowed based on alimony beginning in 2019.
With that in mind, some commentators like Tim Steffen have raised some good points, including:
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It may become easier for an alimony recipient to qualify for the newly expanded $2,000 child credit as eligibility for the credit is based on income
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Children may be able to qualify for more financial aid if the alimony recipient is the custodial parent
As you can see, it is a good time to reconsider your financial strategies for divorcing clients. Overall, we advise you to continue identifying payments as alimony or child support as Congress (or the IRS) may address this issue in the near future.
Reconsider Your Financial Strategies for Divorcing Clients
Our team of litigation support professionals can help family law attorneys form financial strategies for their divorcing couples in light of the new tax law. Contact us online or call 800.899.4623.
