Your client exercised 5,000 incentive stock options last month, her ex-husband just transferred his 401(k) via QDRO, and her 14-year-old earned $15,000 in stock dividends. Every fact triggers a different tax rule, and getting any of them wrong costs tens of thousands.
The Tax Cuts and Jobs Act created one of the sharpest dividing lines in tax law. The date that matters: December 31, 2018.
KEY: Pre-2019 agreements: alimony is deductible by the payor and includable by the recipient. Post-2018 agreements: neither deductible nor includable.
Pre-2019 agreements that are modified after 2018 keep the old rules unless the modification expressly adopts the new treatment.
HIGH-FREQUENCY: The alimony date-of-agreement rule is one of the most commonly tested divorce tax facts. Identify the agreement execution date as your first step.
Child support is never deductible and never taxable, regardless of the agreement date. If payments drop when a child reaches a certain age, the IRS reclassifies the reduction as child support retroactively, even if the agreement calls it alimony.
Common mistakes
- Confusing the alimony date rule. The dividing line is when the agreement was executed, not when the divorce was filed or payments began. A divorce filed in 2018 but finalized in 2020 follows post-2018 rules. Trap: showing a deduction for the payor on a 2022 agreement.
- Applying the QDRO penalty exception to IRAs. The penalty-free exception applies only to distributions from the qualified plan. Once funds roll to an IRA, the exception evaporates. Trap: calculating no penalty on an IRA withdrawal after a QDRO rollover.
- Thinking Section 83(b) applies to RSUs. The election requires a transfer of property. RSUs are a promise, not property. Trap: any answer referencing an 83(b) election for RSUs.
Bottom line
- Post-2018 alimony is not deductible by the payor and not includable by the recipient; the agreement execution date controls, and pre-2019 agreements keep the old rules unless modified to opt in.
- Section 1041 treats divorce property transfers as tax-free with carryover basis, so negotiate after-tax value, not face value.
- QDRO penalty exception applies only to distributions taken directly from the qualified plan, not from a rollover IRA.
- ISOs have no regular tax at exercise but trigger AMT on the bargain element; meeting the two-year/one-year holding periods converts the gain to LTCG.
Exam shortcut
In divorce scenarios, find the agreement date first (before or after December 31, 2018), everything flows from that. For stock options, identify ISO vs. NSO immediately; the tax treatment at exercise is opposite. For passive activity questions, classify the income type first (active, passive, portfolio) before analyzing losses. Remember: QDRO from the Plan = Penalty-free. ISO holding: "2-1 and done" (2 years from grant, 1 from exercise).
The full lesson (about 2,642 words, 18 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- E.42
Browse all free CFP lessons or jump into free CFP practice questions.