How does the timing of a 2018 legal separation and a 2023 divorce affect the deductibility of alimony payments?
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The timing of a 2018 legal separation and a 2023 divorce is critical in determining the deductibility of alimony payments due to changes in the tax law under the Tax Cuts and Jobs Act (TCJA).
1. Key Legal Background
- Pre-TCJA Law (before 2019): Under IRC §71 and §215, alimony payments made under a divorce or separation instrument executed on or before December 31, 2018, were deductible by the payer and includible in the recipient’s income.
- Post-TCJA Law (after 2018): For divorce or separation instruments executed after December 31, 2018, or modified after that date with an express statement that the new law applies, alimony is neither deductible by the payer nor includible in the recipient’s income.
2. Application to Your Scenario
a) Legal Separation in 2018
- If a legal separation agreement (or other qualifying "divorce or separation instrument" as defined in IRC §71(b)(2)) was executed on or before December 31, 2018, the pre-TCJA rules apply.
- Alimony payments made under this instrument are deductible by the payer and includible in the recipient’s income, provided all other requirements of IRC §71(b) are met (e.g., payments are in cash, not designated as non-alimony, not made while spouses are members of the same household, and terminate at the recipient’s death).
b) Divorce in 2023
- If the 2023 divorce decree does not modify the terms of the 2018 legal separation agreement, and the original agreement remains in effect, the pre-TCJA rules continue to apply to alimony payments made under that original instrument.
- If the 2023 divorce decree modifies the 2018 agreement and expressly states that the TCJA rules apply, then the new (post-2018) rules apply to payments made after the modification—meaning alimony is no longer deductible by the payer nor includible in the recipient’s income.
c) Incorporation or Merger of Agreements
- If the 2018 separation agreement is incorporated but not merged into the 2023 divorce decree (i.e., it survives as a separate contract), and is not modified, the pre-TCJA rules still apply.
- If the agreement is merged and modified, and the modification expressly states the new law applies, the post-TCJA rules apply to payments after the modification.
d) IRS Rulings and Examples
- The IRS has ruled that payments made under a pre-2019 instrument, even after a subsequent divorce, remain deductible/includible if the instrument is not modified to adopt the new law.
- In PLR 202426011, the IRS confirmed that payments under a postnuptial agreement executed before 2019, and incorporated but not merged into a later divorce decree, continued to be treated as deductible alimony under pre-TCJA law.
3. Summary Table
4. Practical Implications
- If the 2018 legal separation agreement remains unmodified and governs the alimony payments, those payments are deductible by the payer and includible by the recipient, even after the 2023 divorce.
- If the 2023 divorce decree modifies the agreement and expressly states the new law applies, payments after the modification are not deductible/includible.
- If the 2023 divorce decree incorporates but does not merge or modify the 2018 agreement, the pre-TCJA rules continue to apply.
5. Additional Considerations
- The specific language of the agreements and any modifications is crucial. If the modification is silent on the application of the new law, the pre-TCJA rules generally continue to apply.
- Payments must still meet all other requirements for alimony under IRC §71(b) as in effect before repeal.
In summary: The deductibility of alimony payments depends on whether the payments are made under a pre-2019 instrument that has not been modified to adopt the new law. The 2018 legal separation agreement allows for deductibility and inclusion, even after a 2023 divorce, unless the agreement is modified after 2018 and the modification expressly states the new law applies.
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