In December of last year, the president signed into effect a new tax law. Among other things, this law will affect the tax impact of the payments of spousal support (also called maintenance or alimony).
Effective January 2019, spousal support will no longer be deductible by the person paying it and will be taxable to the person receiving it.
The practical problem with that is, in the past, the deductibility of maintenance was used as a negotiating tool to which helped parties arrive at settlements for the payment of spousal support. The deductibility of maintenance was of value to the spouse that was paying, due to the fact that it would generally cost the payor spouse only two-thirds of the support amount since it could be deducted from the payor’s income.
For example (and depending on the tax bracket of the party paying spousal support), if the spousal support obligation were $60,000 per year, after deducting that sum on the payor’s tax return, it would result in a net cost of approximately $40,000 per year.
The person receiving it, the “non-monied” spouse, is generally in a lower tax bracket. Accordingly, that party would have a lower tax obligation, and there would be more money to go around.
The other significant issue arising from the changes in the tax code is that New York’s maintenance formula was drafted based upon the prior tax code. The legislature created a specific formula for calculating spousal maintenance; however, this formula was calculated and put into effect based on the assumption that spousal maintenance was tax deductible to the payor.
There is now a question as to whether the New York State formula will be valid at all anymore? Are the courts going to simply disregard it because this change in the tax code was not considered when it was drafted? Or is the legislature going to come up with a new formula?
These unanswered questions are fueling the race to the “finish line” for couples in the middle of a divorce — because agreements signed before the end of this year will not be impacted by the change in the tax code.
If you are concerned about the impact of the tax law on your divorce, or if you have any other divorce or family law related questions, Contact us at email@example.com. Our attorneys can help you through the process by negotiated settlement, litigation, mediation or collaborative law.