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DO YOU KNOW HOW THE NEW TAX LAW EFFECTS YOUR CURRENT OR PAST DIVORCE SETTLEMENT?

The new tax law, Tax Cuts and Jobs Act (TCJA)  significantly impact changes to the tax consequences of the payment of maintenance (formally known as alimony).  Maintenance/Alimony are the payments that may be required by one spouse to pay for the support of an ex-spouse.  There is now a statute or law that sets forth how maintenance/alimony should be calculated, not only for the amount to be paid but the duration or length of payment.  However, the law does not provide for any adjustment or consideration for the new tax law that changes the taxable effect and consequence to the payor and the payee of maintenance. 

Under the old law which applies to any divorce insturment, either a Stipulation of Settlement or a Separation Agreement or Divorce Decree, that was duly signed and executed on or before December 31, 2018, the payment of maintenance would be a tax deduction for the payor and taxable income to the payee.  Caution, and Important Note: notwithstanding the forgoing, if an Agreement or Decree that would qualify under the old tax law, is modified or changed after December 31, 2018, then that change, or modification would bring that Divorce under the new tax law.  Therefore, the existing tax deductions would be erased.  It is unclear yet whether the modifications must concern maintenance only.

For individuals that are required to pay maintenance, the change in the tax law can be very expensive, since the tax savings that were previously available, permitting a deduction of maintenance payments, can be substantial. 

As of January 1, 2019, maintenance payments are no longer tax deductible by the payor and recipients no longer have to include them as taxable income.  This applies to all divorce Agreements that are executed after December 31, 2018.  Important note, as previously mentioned, this also applies to any divorce Agreement that is modified after December 31, 2018.  So, if your maintenance was tax deductible in your original Agreement and the Agreement is thereafter modified after December 31, 2018, you may no longer have the benefit of that tax deduction due to the modification of that Agreement.  As a point of information, child support payments and the division or distribution of marital assets, known as Equitable Distribution, are treated as non-deductible personal expenses for the payor and tax-free payments for the recipient.  Therefore, there is no tax consequence for either party, with respect to equitable distribution of marital assets or the transfer or receipt of a distribution of monies, property, etc., that were marital and now have been distributed between the two parties or the payment of child support for the support of children of the marriage.

Keep in mind, even if your Agreement qualifies under the old tax law, there are requirements to be met for maintenance to be tax deductible.  So, first your Agreement must be either a written Divorce or Separation Agreement/Instrument or an actual Divorce Decree or Separation Decree that was executed and/or entered on or before December 31, 2018.  Second, in order for maintenance to be tax deductible, it must meet the following requirements:

1. The payments are made pursuant to a written Divorce or Separation Agreement.
2. The payments must be made in cash or cash equivalent.
3. Payments must be to or on behalf of your spouse or ex-spouse, not a third party. Therefore, payments to third parties, such as an attorney or mortgage lender are permitted if they are made on behalf of a spouse or ex-spouse and pursuant to a written Divorce or Separation Agreement, or a written request of the spouse or ex-spouse. 
4. The ex-spouses cannot live in the same household or file joint tax returns. If the ex-spouses are sharing or living in the same household or if they choose to file a joint tax return for tax benefits, then these events will disallow a tax deduction for the payment of maintenance. 
5. The payment cannot be child support. To preserve the deductible maintenance payment(s) cannot be classified as or deemed to be child support under the maintenance tax rules.  What constitutes child support or what may be “deemed” child support and the rules regarding these classifications are complicated and can create a nasty trap for an uneducated tax payer.  It is important to consult a tax professional when considering the tax ramifications of your existing or current Divorce Agreement with respect to the taxable impact of maintenance and when trying to sort out the rules regarding child support or what may be “deemed” child support in your Agreement
6. No obligation for the payment of maintenance are to continue after the recipient’s death. In other words, your Agreement must provide that any obligation to make payments for maintenance (other than payments of delinquent amounts that may be due pursuant to the Agreement) must cease upon the payee or recipient’s death.  If your Divorce Agreement or Divorce Decrees are unclear about whether or not the payments must continue, applicable state law controls.  So, the payment obligations must cease in the event of the recipient’s death in order for the payments to qualify as tax deductible maintenance.  This oversight is the most common reason for lost maintenance deductions. 

Based upon the current law, maintenance can be extremely impactful, not only in the  monetary amount to be paid but the duration, how long maintenance is paid.  The duration of the marriage will determine the length of or how many years maintenance must be paid.  So, for tax purposes, this is an incredibly significant financial loss with the eraser of this tax deduction. This will also impact how future divorce settlements are negotiated and implemented. 

The new tax law makes significant changes not only to the deductibility of maintenance but personal injury law suit recoveries.  For a personal injury law suit recovery, there is no longer a write off for legal fees or the cost of the personal injury law suit.  The person receiving a significant Personal Injury award, will now be taxed on all of their award.  This might not seem like a big issue, but when you consider it includes lawsuits related to various issues, such as privacy, deformation of character, divorce, child custody, wrongful imprisonment, malpractice, punitive damages and other common legal problems, the impact is likely to be much more widespread among tax payers. 

These significant changes to the deductibility of these items can add up to significant liability on your tax return.  Therefore, it is always important to make sure you discuss your personal legal situation and tax implications with a tax professional to make sure the decisions you make are tax prudent.

My colleagues and from the Long Island Collaborative Divorce Professionals (LICDP), had the privilege of speaking at Lift Up. We shared information on healthier alternatives to traditional divorce and how to resolve conflict without ever stepping into court! We had a great time and thank Lift Up for hosting

us.  

My Colleagues and I from the Long Island Collaborative Divorce Professionals (LICDP) appeared on The Justice Hour with Pamela Roth Esq.  We discussed how the Collaborative Process helps families navigate Divorce and heard directly from one of our Financial Experts, Donna LaScala, RFC about the impact and benefits of having a Neutral Financial Professional assist your family in the process.

https://www.facebook.com/VillageConnectionNetwork/videos/371671160352371/

Join us Thursday March 14^th, 6:30-9pm at The Bluestone Tavern located at 21 Montauk Highway, West Sayville, NY / 631-567-0900 for the LIFTUP meeting where my colleagues and I from Long Island Collaborative Divorce Professionals (LICDP) will present The Collaborative Process as an alternative to a traditional litigated Divorce.

LIFTUP provides Long Island women an open platform to support each other at networking events. Our core mission is to host fundraising events for community-focused charities and raise awareness for women-centric topics. We provide support and education to help broaden the personal and professional growth of our members.

Tune in on Sunday March 10, 2019 at 10:00 am, as Long Island Collaborative Professionals appear on the Justice Hour with Pamela S. Roth, Esq. P.C. on the Village Connection Network to discuss the Collaborative Process as an alternative to a traditional litigated Divorce.  We will outline the Collaborative Process and answer any questions that you may have. 

If you or someone you know has questions about divorce or how to get a divorce without going to Court. I am attending this value-packed event as one of the professionals available to answer your questions. If you or any one you know could benefit from this workshop please register at the link below. It’s Free and it’s not too late to register!

https://www.eventbrite.com/e/well-informed-divorce-learning-series-february-2019-registration-54742278629?aff=ConcettaSpirio

So many people have sticker shock when they realize how much it costs to get a divorce.  The most expensive and the longest process to obtain a divorce is a traditional litigated divorce through the court system.  Although, in order to obtain a divorce, a legal action must be commenced and processed through the New York State Supreme Court System, that does not mean the case needs to be litigated through the court system or that the individual parties need to go to court.  There are alternative methods that are more humane; take less time and are less costly to obtain a divorce.  Even though there are alternative methods, no divorce is inexpensive or for free. 

Many of the costs involved are a result of the negotiating of all issues that need to be resolved; the Court filing fees and more importantly the sheer amount of documents that are required by the court system before a divorce can be granted.  One look at the volume and complexity of documents that are required to be prepared for the “Uncontested Divorce Packet” in New York, alone is enough to make someone feel sick to their stomach.  The reality is there is a vast difference in the costs of obtaining a divorce, depending on which modality or method you choose.  This difference can add up to not only tens of thousands ($$,$$$) but hundreds of thousands of dollars ($$$,$$$) when the cost to the couple and the marital assets are considered. 

Further, the actual time spent in obtaining a divorce varies greatly depending on the modality or method that you choose.  No one has control over how long the Court will take to process the necessary paper work to finalize a divorce.  However, there is a significant difference between a case that is litigated, and goes through the Court system as opposed to a case that goes through an alternative method such as Mediation or Collaborative processes. 

The difference on how your money is spent and how your money works for you can be drastically different depending on the process you choose. Traditional divorce cannot only devastate your finances but can have a devastating impact on your mental and physical well-being.  The alternative methods of Mediation and Collaborative are a much healthier process, not only for the individuals mentally and physically but to their financial futures when a couple chooses to dissolve their relationship.  There is nothing more stressful and contentious as a litigated matter, which stands in stark contrast to the healthier forms of Mediation and Collaboration.  This is not to say that stress and discourse do not exist in the other modalities, but they can be minimized and channeled in much more effective ways so that the parties can navigate this transition and in the end be much better off mentally, physically and financially. 

          There are two ways that I like to describe how your money can be spent or your money can work better for you.  One is an example that I watched my sister use with my nephew when he chose to pump up the thermostat rather than put on a sweater.  She took out a five-dollar bill (representing his allowance) and said that every time you pump up the thermostat, it like doing this and she put the five-dollar bill on fire and let her son watch it burn.  The effect was dramatic.  He quickly understood how quickly money can literally be burned up simply by turning up the thermostat.  Likewise, how your money is spent or how it works for you in the dissolution of your marriage is very similar when you contrast the methods of Mediation and Collaborative dissolution, to a litigated divorce.  In the litigated divorce both parties are paying substantial monies and an initial retainer to merely retain litigation counsel for the divorce.  The substantial retainer, which could be thousands of dollars does not get you to the conclusion of your divorce but is just the money to get you past the initial starting line.  In addition, like watching that five-dollar bill go up in smoke, the parties could be sitting in the court house for a good portion of a day watching counsel for both sides sitting there in the hall way of the court house or in the gallery of the court room, waiting for your case to be called.  When your case is finally called, does anything really get done?  No, most times, unless you are actually on trial, your case is being conferenced, either by the Law Secretary or the Judge, which means your attorneys get to go behind the bench in the court room, behind closed doors in the Judge’s chambers to discuss your case for maybe five to ten minutes and the result is usually scheduling the next conference date to do the same thing all over again.  So, of the ten minutes that your attorney was actually working on your case, you are spending thousands of dollars for your attorney to be there waiting for your case to be called, three-quarters of a day, half a day or all day depending on the court’s calendar.  In addition, you may be also paying for the ineptitude of an advisory’s counsel.  If your spouse has counsel that has other matters on or just doesn’t really get the work done in between court dates, then your case may be delayed based on your spouse’s counsel’s ineffective work.  Your case may be delayed even if your attorney is ready, willing and able to go, because your spouse’s counsel has more than one matter on or has not done what was required during the interim period between court dated.  Instead of getting anything done, the case merely gets adjourned.  Appear, conference, adjourn and repeat!

          So, how is Collaborative or Mediation different and how is your money not merely spent but is actually working more effectively for you?  In those modalities, your money is actually being used for the time that is being spent actively working on the resolution of your matter.  No one is being paid merely to sit around and do nothing!  Instead, the professionals are being paid to actively work on your matter to resolve the issues, with each of the participants in Mediation or each of the members of the Collaborative team working on the issues that need to be resolved to ultimately get the dissolution or divorce.  That includes drawing the paper work that needs to be done to ultimately get the divorce.  Would you rather pay someone who is actively working on your case and you can see the time that is actually being spent for something constructive to be done, or would you rather watch that thousand dollar burn up while your attorney and the people on your case are sitting and waiting for their five minutes before the Judge.

          In addition, the totality of time that is spent on your case is greatly diminished in both Mediation and Collaborative Processes, while a case can languish in the court system for a year or more, depending on how litigious the parties choose to be.  Your Collaborative attorneys and team members are not faced with the court’s calendar and lack of personal available to process your case.  You are paying for people to work on your case right away.  So long as the participants are cooperative, your case can be processed much more expeditiously then one that is languishing on the court’s calendar waiting for the availability of the next court date or having months go on between scheduled court appearances or court dates.