Grandfathered but Modified: The Continuing Federal Tax Treatment of Pre-TCJA Alimony After Florida’s Alimony Reform

Florida’s recent alimony reforms have altered the landscape of family law practice. Effective July 1, 2023, Florida eliminated permanent alimony as an available form of alimony in new dissolution actions.^[1] While much attention has focused on the impact of the legislation on future divorce cases, less attention has been paid to existing alimony awards that remain in effect and continue to be modified under Florida’s post-reform alimony framework.

Consider a former husband who, according to a final judgment entered in 2016, pays $8,000 per month in permanent periodic alimony. Following a substantial change in circumstances, the parties agree to modify the obligation. Rather than continuing permanent periodic alimony, they negotiate a settlement converting the obligation into eight years of nonmodifiable alimony. The modification appears to benefit both parties. It reduces future litigation, provides certainty, and resolves a contentious dispute. Yet, a modification intended to save a few thousand dollars per month in alimony may inadvertently place at risk a federal tax deduction worth tens of thousands of dollars over the remaining life of the obligation.

Before the Tax Cuts and Jobs Act of 2017 (TCJA), alimony generally was deductible by the payor spouse under I.R.C. §215 and includible in the recipient spouse’s income under I.R.C. §71.^[2] Congress fundamentally changed that treatment through the TCJA, eliminating both the deduction and inclusion regime for divorce or separation instruments executed after December 31, 2018.^[3] Congress did not, however, eliminate the prior tax treatment for all alimony obligations. Instead, the TCJA’s transition rule generally preserved prior law for divorce or separation instruments executed on or before December 31, 2018.^[4]

Many practitioners understand that certain pre-2019 alimony obligations may retain their favorable tax treatment. What is often overlooked, however, is that the deductibility of those obligations remains governed by former I.R.C. §71 and its requirements.^[5]

The issue is particularly relevant in Florida following the elimination of permanent alimony. Existing permanent alimony awards entered prior to July 1, 2023, remain subject to modification.^[6] Practitioners may, therefore, face decisions regarding whether to modify an award while preserving its existing structure or instead convert the obligation into a different form of alimony. In some cases, a modification may simply reduce or increase the amount of alimony. In others, the parties may elect to convert the obligation into a different type of alimony.

This article examines the intersection of two legal developments often analyzed separately: The TCJA’s preservation of pre-2019 alimony tax treatment and Florida’s post-2023 modification of legacy alimony awards. Although a post-2018 modification does not automatically eliminate grandfathered federal tax treatment under the TCJA, the modified obligation must still satisfy the substantive requirements of former I.R.C. §71. The inquiry is, thus, whether the modification changes the nature of the obligation in a way that affects its continued federal tax treatment.

Grandfathered Alimony After the Tax Cuts and Jobs Act

Prior to the TCJA, alimony payments meeting the requirements of I.R.C. §71 were generally deductible by the payor spouse under I.R.C. §215 and includible in the recipient spouse’s gross income under I.R.C. §71. The TCJA fundamentally altered that framework by eliminating both the deduction and corresponding income inclusion for divorce or separation instruments executed after December 31, 2018.^[7] That means for post-TCJA original agreements/judgments awarding alimony, no alimony payments would be deductible by the payor spouse and no payments received by the payee spouse would be included as taxable income.

Congress did not, however, eliminate the prior alimony tax regime in its entirety. Instead, the TCJA included a transition rule preserving the preexisting treatment for divorce or separation instruments executed before January 1, 2019. TCJA, thus, only applies to instruments executed after December 31, 2018, and to instruments executed on or before that date if the instrument is modified and the modification expressly provides that TCJA applies.^[8] Unless a modification expressly elects application of the TCJA, a pre-2019 divorce instrument remains governed by prior law despite being modified after December 31, 2018.^[9]

Practitioners often stop the analysis there. If the divorce instrument predates January 1, 2019, and the modification does not expressly elect TCJA treatment, deductibility may appear preserved. The grandfathering provision, however, preserves more than the possibility of deductibility. It preserves the application of former I.R.C. §71, which contains the requirements governing whether a payment qualifies as deductible alimony.^[10]

Accordingly, the question is not whether a modified pre-2019 divorce instrument remains grandfathered under the TCJA. Rather, it is whether the modified obligation continues to satisfy the requirements of former I.R.C. §71.^[11] That inquiry becomes particularly important when a modification changes the structure of the obligation itself, such as when permanent periodic alimony is converted into a fixed-term payment arrangement.

Grandfathered Into What? The Requirements of Former I.R.C. §71

Understanding the tax implications of a modified alimony obligation requires understanding what, exactly, was preserved by the TCJA’s grandfathering provision. While practitioners often focus on the continued availability of the deduction, the grandfathering provision preserved the continued application of former I.R.C. §71, including the statutory requirements that determined whether a payment qualified as deductible alimony in the first place.^[12]

Former I.R.C. §71(b)(1) provided the core requirements for a payment to qualify as alimony.^[13] The payment had to be: 1) made in cash; 2) received by or on behalf of a spouse under a divorce or separation instrument; 3) not designated by the instrument as a payment that was excludable from the recipient spouse’s gross income; and 4) nondeductible by the payor spouse.^[14] In the case of spouses legally separated under a decree of divorce or separate maintenance, the payor and recipient spouses could not be members of the same household when the payment was made.^[15] In addition, there could be no liability to make any payment after the death of the recipient spouse and no liability to make any substitute payment following the recipient spouse’s death.^[16] Payments treated as child support or property settlement payments were not deductible alimony.^[17] Transfers of property incident to divorce were governed separately and generally were treated as nonrecognition transactions rather than deductible alimony payments.^[18]

Many of these requirements rarely present significant challenges. The death-termination requirement, however, has generated substantial litigation and remains particularly relevant when modifying grandfathered alimony obligations.

Congress distinguished qualifying alimony payments from property settlement obligations.^[19] Under former §71, deductible alimony was required to possess the characteristics associated with continued support.^[20] Consequently, the obligation had to terminate upon the death of the recipient spouse.^[21] If payments continued after death, or if another obligation arose as a substitute for those payments, the payments failed to qualify as deductible alimony under former §71.^[22] If a payment obligation survived death and created a vested right, then it appeared to look more akin to a property division instead of a continued support obligation.

The distinction is particularly important because federal tax law focuses on the substance of the obligation rather than the label assigned under state law. Thus, the fact that an obligation is described as alimony under Florida law does not resolve whether the obligation satisfies the requirements of former §71. As discussed below, federal courts examine the actual nature of the obligation and the parties’ rights upon death when determining whether payments qualify as deductible alimony.^[23]

Accordingly, when modifying a grandfathered alimony obligation, practitioners should consider not only whether the modified obligation remains characterized as alimony under Florida law, but also whether the modification alters the characteristics that permitted the payments to qualify under former §71.

Federal Characterization of Alimony and the Significance of Muñiz

Muñiz v. Commissioner, 661 Fed. App’x 1027 (11th Cir. 2016), demonstrates why the characterization of an alimony obligation under Florida law does not necessarily determine its treatment under federal tax law. In Muñiz, the 11th Circuit considered whether payments arising from a Florida divorce proceeding qualified as deductible alimony under former I.R.C. §71. Although Florida law defined the nature and extent of the parties’ rights under the obligation, the court independently analyzed whether those rights satisfied the requirements imposed by federal tax law.^[24]

In Muñiz, the parties’ marital settlement agreement required the former husband to make installment payments to his former spouse according to a “lump sum alimony award.”^[25] The taxpayer deducted those payments as alimony.^[26] The Internal Revenue Service disallowed the deductions, asserting that the payments did not qualify as deductible alimony under former §71 because the obligation failed to satisfy the statutory requirement that there be no liability to continue payments following the recipient spouse’s death.^[27]

The 11th Circuit analyzed the nature of the obligation under Florida law and explained that the label attached to an award is not necessarily dispositive.^[28] Florida law recognizes different forms of alimony, and the manner in which payments are structured does not alone determine the character of the obligation.^[29] A property division may be paid periodically, but an alimony award can also be paid as a one-time payment.^[30] In Muñiz, because the divorce instrument was silent as to whether the obligation would terminate upon the recipient spouse’s death, the payments failed to satisfy former I.R.C. §71(b)(1)(D) and were not deductible alimony for federal income tax purposes.^[31]

The case illustrates the broader principle that federal tax consequences depend on the substantive rights created by the obligation, not merely the terminology used by the parties or the state court. A payment described as “alimony” under Florida law does not automatically qualify as deductible alimony under former §71.

That principle becomes particularly important when modifying alimony obligations arising under divorce or separation instruments executed before January 1, 2019. A modification that merely changes the amount or payment method of an existing permanent periodic alimony obligation may not substantially alter the nature of the obligation. Different considerations may arise, however, when the modification creates a fixed payment term, makes the payment stream nonmodifiable, alters the termination provisions, or otherwise changes the rights associated with the original alimony award.

To be clear, Muñiz did not address durational alimony or the modification of grandfathered pre-2019 alimony awards. However, its reasoning provides an important framework for analyzing these modifications. As practitioners increasingly revisit legacy alimony awards following Florida’s 2023 alimony reforms, the relevant inquiry does not end with the Florida label assigned to the modified obligation. Practitioners need to consider whether the modified obligation continues to satisfy the requirements that permitted deductibility under former §71.

Florida’s Alimony Reform and the Continuing Modification of Permanent Alimony

Florida’s 2023 alimony reform substantially changed the forms of alimony available in dissolution proceedings filed or pending after the statute’s effective date. The current version of §61.08 authorizes courts to award temporary, bridge-the-gap, rehabilitative, or durational alimony, but no longer includes permanent alimony among the listed forms of alimony available under the statute.^[32] The session law likewise described the act as “removing a provision authorizing the court to award permanent alimony.”^[33]

The reform also imposed new limitations on durational alimony. Durational alimony may not be awarded following a marriage lasting less than three years, and the length of a durational alimony award generally may not exceed 50% of a short-term marriage, 60% of a moderate-term marriage, or 75% of a long-term marriage.^[34] The amount of durational alimony is limited to the obligee’s reasonable need or an amount not exceeding 35% of the difference between the parties’ net incomes, whichever is less.^[35]

The reform also amended §61.14 by revising the supportive-relationship provisions and adding a statutory framework for modification based upon the obligor’s retirement.^[36] Those amendments changed important aspects of modification practice, but they did not convert §61.14 into a mandatory reclassification statute for existing permanent alimony awards.^[37]

The reform, however, did not purport to erase existing permanent alimony awards. Section 61.08’s applicability provision states that the amended section applies to “initial petitions for dissolution of marriage or support unconnected with dissolution of marriage pending or filed on or after July 1, 2023.”^[38] That language is important because it addresses initial petitions; it does not state that preexisting permanent alimony awards are automatically converted into durational alimony or any other form of alimony.^[39]

Existing alimony obligations continue to be modified through §61.14. That statute authorizes either party, upon a qualifying change in circumstances or financial ability, to seek an order decreasing, increasing, or confirming the amount of support, maintenance, or alimony, subject to the statute’s requirements.^[40] Although the legislature amended §61.14 as part of the 2023 reform, including the supportive-relationship and retirement provisions, it did not add language requiring courts to reclassify an existing permanent alimony award into one of the forms of alimony authorized for new awards under §61.08.^[41]

That statutory structure matters. Florida law now limits the forms of alimony available in covered initial proceedings, imposes amount and duration limits on durational alimony, and changes the framework within which some modification issues are litigated. However, the text of §§61.08 and 61.14 does not answer every question that may arise when parties substantially restructure a legacy permanent alimony obligation. For example, if the parties agree to replace an existing permanent periodic alimony obligation with a fixed stream of nonmodifiable durational payments, the state law question may be whether the modified obligation remains a modification of an existing award or creates a materially different support obligation.

For purposes of this article, however, the federal tax question is separate. State law defines the legal rights and obligations created by the judgment or agreement, but federal law determines the tax consequences flowing from those rights.^[42] Accordingly, regardless of how Florida courts ultimately characterize substantially modified permanent alimony awards, practitioners seeking to preserve the deductibility of grandfathered obligations should evaluate the substantive rights and obligations created by the modification under former I.R.C. §71 rather than relying solely on the Florida label assigned to the modified obligation. Legacy alimony may be modified within Florida’s post-reform alimony framework while continuing to be tested under an older federal tax regime.

A Practical Framework for Evaluating Modified Grandfathered Alimony Obligations

The TCJA’s transition rule begins with a threshold question. Does the modification expressly provide that the TCJA amendments apply? If so, the parties have relinquished the grandfathered treatment, and the alimony payments are no longer deductible by the payor or includible in the recipient’s income under the pre-TCJA framework. If not, the modification does not automatically eliminate grandfathered treatment. The modified obligation remains subject to former I.R.C. §§71 and 215. If drafting the modification, the practitioner should be clear as to the intent of the modification.

When the parties modify a pre-2019 obligation, practitioners must examine the rights and obligations created by the modified instrument, including whether the obligation terminates upon the recipient spouse’s death, whether any payments are owed to the recipient’s estate, and whether any substitute obligation arises after death.

A modification that merely adjusts the amount of permanent periodic alimony following a substantial change in circumstances may leave the essential characteristics of the obligation unchanged. The modified obligation should, thus, continue to reflect an ongoing support obligation that terminates upon the death of the recipient spouse and otherwise satisfies the requirements of former §71. It is also recommended to state in the modification document that the modification is the amount only, that the parties intend to preserve pre-TCJA treatment, and that the “type” of alimony is preserved.

Other modifications warrant closer examination. A modification may replace permanent periodic alimony with a fixed stream of payments, convert an otherwise modifiable obligation into a nonmodifiable payment arrangement, alter termination provisions, change periodic payments into a single payment, or otherwise redefine the parties’ respective rights and obligations. These modifications may be entirely appropriate under Florida law. They do not necessarily destroy grandfathered federal tax treatment. However, they do require practitioners to examine whether the modified obligation continues to possess the characteristics required by former §71.

Consider four possible modifications of the same grandfathered permanent alimony obligation. First, the parties may agree to reduce permanent periodic alimony from $8,000 per month to $5,000 per month, while preserving the existing termination provisions and continuing to provide that the obligation terminates upon the recipient spouse’s death. That modification may change the amount of support without materially changing the federal tax characteristics of the obligation.

Second, the parties may agree to convert the obligation into durational alimony for a fixed period of eight years, while expressly providing that the obligation terminates upon the recipient spouse’s death, that no payments are owed to the recipient’s estate and that no substitute obligation arises after death. That modification warrants careful review, but the durational label or fixed term alone should not determine the federal tax result and, as long as all I.R.C. §71 requirements are met, as they appear to be, the alimony will continue its pre TCJA treatment.

Third, the parties agree to convert the obligation into a lump-sum payment that has the intent and impact of concluding the obligation. The payor spouse decides to fund the payment by cashing out a retirement fund and pays the tax on the gain associated with that distribution. The modification agreement states that pre-TCJA treatment is intended to be preserved, as is the type of alimony, and that only the payment terms have changed. The modification is silent as to whether the lump-sum or one-time payment is vested or terminates upon the death of the recipient spouse.

Due to the amount of the alimony deduction in connection with the retirement distribution, the payor’s return gets flagged for an IRS audit. The IRS revenue agent examining the return argues that: 1) the obligation now looks like a property distribution and not ongoing support; and 2) since the modification is silent as to vesting or the termination of the obligation if the recipient spouse passes, the modification runs afoul of the §71 requirements that were preserved. The dispute continues through the administrative dispute process to IRS appeals and eventually to Tax Court.

Luckily, however, the original marital settlement agreement states that the permanent periodic alimony does not continue upon the death of the recipient spouse and otherwise already provided for the distribution of the assets. As such, when the original agreement and the modification are viewed together, it is clear that the type of permanent periodic alimony was preserved, including the termination upon recipient spouse’s interest upon death provision, that only the form and amount of payment is modified, and the payment was made with already distributed proceeds. The modification agreement could have been made stronger by explicitly containing the requirements that the lump-sum payment type does not create a vested right or survive the possible death of the recipient spouse.

Fourth, the parties may replace the original support obligation with a fixed sum payable over eight years, provide that the unpaid balance survives the recipient spouse’s death, or require the remaining payments to be made to the recipient’s estate. In that circumstance, the modified obligation would no longer possess the death-termination characteristic required by former I.R.C. §71 and would generally fail to qualify as deductible alimony under the pre-TCJA framework.

These examples illustrate that the federal tax issue is not whether the modification uses the words “permanent alimony,” “durational alimony,” or other type of alimony. The issue is whether the legal rights altered by the modified instrument continue to reflect deductible support under former §71 or more closely resemble a vested property obligation.

The economics of that distinction may also change the negotiation dynamics. A payor spouse may value the continued deduction because it reduces the after-tax cost of the obligation. A recipient spouse, however, may prefer not to receive taxable alimony income and may evaluate the settlement differently if pre-TCJA treatment is intentionally relinquished. If the deduction is preserved, the parties may negotiate one set of numbers. If the deduction is not preserved, the payor may seek a lower payment to account for the loss of the deduction, while the recipient may be willing to accept less because the payments are no longer includible in income. Thus, the tax treatment should not be an afterthought as it may be part of the economics of the bargain itself.

Before negotiating or drafting a modification, practitioners should first identify the client’s objectives, many of which have nothing to do with the tax treatment whatsoever. The tax implications should be considered in the negotiations. In some cases, the parties may have little interest in preserving the historical tax treatment of the obligation. In others, the continued deductibility of alimony may represent a substantial economic benefit. When preserving grandfathered treatment matters, the practitioner should compare the legal rights and obligations created by the original instrument with those created by the proposed modification.

Does the obligation continue to terminate upon the death of the recipient spouse? Are any payments owed to the recipient’s estate? Does any substitute obligation arise following the recipient’s death? Has the modification created a vested right to future payments? Has an otherwise modifiable support obligation become a fixed or nonmodifiable payment stream in a manner that changes the nature of the obligation? Does the modified instrument otherwise continue to satisfy the requirements of former §71?

None of this suggests that modifications converting permanent alimony into another form of support necessarily destroy grandfathered tax treatment. Nor does it suggest that retaining the permanent alimony label necessarily preserves deductibility. Rather, the better practice is to recognize that Congress presumed the continued application of former I.R.C. §§71 and 215 unless the parties expressly elected otherwise, while also remembering that only payments satisfying the requirements of former §71 qualify for deductible treatment.

Thus, practitioners seeking to preserve grandfathered treatment should deliberately consider whether the modification agreement should: 1) avoid expressly electing application of the TCJA amendments unless that result is intended; 2) clearly state whether the obligation terminates upon the recipient spouse’s death; 3) state whether any payments are owed to the recipient spouse’s estate; 4) state whether any substitute payments or property transfers arise after the recipient spouse’s death; 5) avoid language suggesting a vested fixed property right unless that result is intended; 6) separately identify any property settlement, equalizing payment, arrearage repayment, or security provision; and 7) confirm that the parties understand whether the objective is to preserve or intentionally relinquish the continued federal tax treatment of the obligation.

Conclusion

Florida’s 2023 alimony reforms have changed the landscape of family law practice. While the legislation appears to preserve existing permanent alimony awards and their continued modification under §61.14, it leaves open important questions regarding the legal characterization of substantially modified obligations. Those questions will undoubtedly continue to develop through future litigation and judicial interpretation.

Fortunately, practitioners need not await definitive answers to begin the federal tax analysis. Congress answered the threshold question in the TCJA’s transition rule by preserving the continued application of former I.R.C. §§71 and 215, unless the parties expressly elect application of the TCJA. Accordingly, the mere fact that a grandfathered alimony obligation has been modified does not require practitioners to reestablish its federal tax treatment. It does, however, require careful drafting and advocacy to intentionally keep it. Practitioners should determine whether the modified obligation continues to satisfy the substantive requirements of the pre-TCJA statutory framework or whether the parties intend to relinquish that treatment.

This column is submitted on behalf of the Tax Section, Michael J. Wilson, chair, and Charlotte A. Erdmann, editor.

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