Are section 71 payments extinct?
It’s a new year, and with the new year, bring sweeping changes in the tax code as it affects maintenance payments. Under the 2017 Tax Cuts and Jobs Act, for any new cases after 1/1/19, one can no longer deduct maintenance (alimony) payments, nor are they taxable income to the recipient. In light of that, where does Section 71 payments fit it, and does it even exist anymore?
For those of you who may be unfamiliar with what are called “Section 71 payments,” it is important to understand what it means. It is basically a lawyer created term of art and changes the modifiability of what was traditional maintenance payments to non-modifiable by contract, both as to duration and amount.
When one prior to 1/1/19 would use regular maintenance payments, those payments were subject to modification by either party post judgment, based on a showing of a substantial change of financial circumstances. When parties entered into a “Section 71 payment,” that took the ability to modify the payments in the future by either party. It was a contractual agreement and it could not be changed in the future by either party or by the court, if such an agreement was reached. It was a very useful tool when negotiating maintenance as it gave the parties the flexibility to set their own terms as to the amount of support, the duration of support, knowing that what the parties had bargained for, was exactly what they were going to get down the road. There would be no uncertainty that the amount might change in the future, or the payments extended beyond an agreed upon time line. The courts could not order non-modifiable payments on it’s own motion, but if the parties agreed to the same, the court would accept it and enforce it as a binding court order. Such payment would ordinarily terminate upon death of either party or the recipient’s remarriage, but not always. For tax purposes, under the prior tax code, the payments had to terminate upon the death of the receipient spouse to make the payments deductible to the payer.
Since the deductibility of the payments has now gone away on any new cases after 1/1/19 where maintenance is an issue, does “section 71” still exist and can it be used? I think it does exist and it can still be a useful tool to avoid the court in the future, it it’s discretion to modfiy spousal support payments.
Understand the main distinction between the new tax law and the old tax law deals with whether alimony payments can be deducted. It doesn’t affect whether the parties can agree to make non taxable alimony payments limited in duration or amount in a contract, by labelling such payments “section 71.” You simply will not be afforded the tax deductibility of the payments, whether they are called non taxable maintenance payments, or section 71 payments.
You can also not use child support payments to limit the amount or duration. Section 71 payments can only be used where there is maintenance (alimony) involved. Section 71 payments allows the parties, even know, to negotiate an amount of spousal support and limt the amount ever going up or down in the future and further, can fix the term that also cannot be increased or decreased in the future. It was a very useful negotiating tool when dealing with spousal support payments, and remains one even now, notwithstanding the sweeping changes imposed by the Tax Cuts and Jobs Act.
If you have questions on the new tax laws or issues of maintenance in a pending divorce case, contact the premier family law firm of Karp & Iancu, S.C. today for a consultation.