Please Don’t Wait Until The Last Minute

Maintenance/Taxability and You

{3 minutes to read} We mediators are bracing for a very, very busy autumn. December 31st, 2018 is the deadline for making sure that our clients have their Settlement Agreements fully executed and notarized if they want maintenance (spousal support) to continue to be a taxable event.

Prior to the new 2018 Tax Cuts and Job Act (TCJA), maintenance has been tax deductible to the payor and taxable income to the payee as long as the parties file separate tax returns. However, beginning January, 1, 2019, that will no longer be the case unless the parties have their Settlement Agreement signed and notarized by the end of this year.

I imagine the thinking behind this new law is that the higher earner will now be shouldering the higher tax bill. Fair or not, this is the new law of the land.

So for those clients who are in the middle of their mediation and have put things on hold for a while, you may want to resume mediation and finish up sooner rather than later. For potential clients who are thinking of separating — you may want to begin the process now to allow for the time it takes to get everything done.

To summarize:

1. If the parties have a signed and notarized Settlement Agreement before the end of this year, maintenance taxability will continue as before: tax deductible to the payor and taxable to the payee.
2. Additionally, if the parties sign their Settlement Agreements before the end of the year and the maintenance payments extend beyond 2018, the taxability will be grandfathered in. It won’t matter if the maintenance is being paid one month into 2019 or 10 years beyond 2019. It will still be a taxable event.
3. If the parties do not have the Settlement Agreements signed and notarized by the end of this year, the maintenance will no longer be a taxable event. This means the payor cannot deduct the maintenance from his/her taxable income and the payee does not have to add it as taxable income. Period.

There are other aspects of the tax law that impact divorcing couples, but none that have a deadline that matters as much as this one does.

We mediators implore you to be realistic about the timing of getting the work done. Some mediations take longer than others, so it’s important that you have reasonable expectations about what it takes to conclude the mediation before the close of 2018.