Divorce Series Part 7: Tax Cut and Job Act (TCJA) Repeal of Alimony

My name is Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions based on different fact...

Hi, welcome to our discussion on alimony and tax issues involving divorce in matrimonial. Today, we're gonna talk about the TCJA, which, of course, is the Tax Cut and Jobs Act, signed into law on December 22nd, 2017. And as most of you know, this had a lot of effects not only on taxes, in general, but especially on matrimonial and alimony deductions. Because what it did basically was it repealed alimony. And I love how the government goes about doing this. They simply put, you know, this Section 11051 Repealed Deduction for Alimony, and this caused mass havoc throughout the matrimonial community in New Jersey. Because what was happening at the end of 2018, everybody had to get divorced because they wanted that alimony deduction because it means a lot. And why do you think they repealed it? Why do you think the government did away with it? Because this will raise close to $7 billion of taxes over 10 years. So, by reducing...getting rid of this alimony deduction, the government's gonna make another $7 billion. So, what they were doing was they were subsidizing high net worth individuals in divorce, and that's why they got rid of it.

So, this does have...you know, besides losing that deduction, there's a couple of things you should be aware of as a forensic accountant or someone who's getting divorced. If you go back and you do a modification in alimony, let's say you were divorced in 2018. You know, you have the deduction. You wanna get it modified. Well, if you get it modified, you gotta make sure it doesn't affect the deductibility of that alimony, right, because that's a big thing. So, you know, make sure you discussed it with your lawyer.

But some of the other things that happened was, you know, no one really likes to talk about this, but you know, you kind of look at the rule of thumb. And what we used to do as forensic accountants is you would take the monied spouse's income, subtract what the non-monied spouse made or whatever was attributed to her or him. And you deduct it by one...divide it by 3 and that's kind of where the alimony usually turned up and 80% of the cases when we check it that's how it worked. But now, it's not deductible. So, what do you do? Well, we basically do the same formula except, if dividing by 3, we divide it by 4, you know, or multiply it by 0.25. So, basically, in order to account for the laws of that tax deduction, it's like it goes...it's about 8%. It goes from 0.33 to 0.25. And yeah, you could do the math yourself. So, that's something to be aware of.

Now, let's see. Okay. So, there are still requirements that...and a lot of people aren't familiar with this. But in order to be alimony, it has to meet certain requirements. And I'm gonna just go through those here because they are pretty obvious. But the payment must be made pursuant to a written divorce agreement. We had, for a while there our firm was handling a lot of audits, where the government was coming in and auditing alimony deductions because they wanted to go back and see how the divorce agreement was written, to make sure that it was alimony and not child support or education, or things like that.

So this is important, to make sure it is alimony because just because alimony is not deductible now doesn't mean it's not gonna be deductible in the future, right? And they may need to make it retroactively. Who knows? Payments must be made on behalf of the spouse or ex-spouse. Payments not...they cannot be as not alimony. Obvious. I love reading this. Ex-spouse cannot live in the same household or file jointly, it must be cash or cash equivalent, it cannot be child support and social security number is required and payments must stop at the receipt of...obviously, if they die, it should be stopped.

So, basically, it's pretty simple, okay? They passed the tax law because they want to raise $10 billion. And they denied they're not subsidizing wealthier individuals' alimony payments anymore. That's what it comes down to and makes divorces a little simpler. It changes the divisors and multipliers we use to verify or check divorce alimony payments. But basically, the alimony is gonna be calculated based on factors because New Jersey is a court of equity.

So, we covered a lot. But if you guys have any questions, just leave it below on my YouTube channel here. One of my analysts or I will get back to you. Thanks for taking the time to listen. I really appreciate it. Robert A. Bonavito, New Jersey forensic accountant.