Limited Time Remaining for Spousal Maintenance Tax Benefits

The recent passage by Congress of the “Tax Cuts and Jobs Act of 2017” has resulted in sweeping changes to the Internal Revenue Code of 1986, significantly impacting those seeking a divorce in 2018 and thereafter.

For many decades, the payment of spousal maintenance (referred to in the tax code as “alimony”) has been deductible to the person paying alimony and taxed as income to the person receiving alimony.  This was such a fundamental and longstanding principle of divorce law that little thought had been given to the possibility it might change.  However, the alimony deduction is eliminated by the new law.

In that alimony is traditionally paid by the spouse who earns significantly more than the other spouse (and is therefore in a higher tax bracket), and in that alimony is traditionally received by the spouse earning significantly less income than the other spouse (and is therefore in a lower tax bracket), the deductibility of alimony payments has historically permitted spouses to agree on somewhat higher payments than they might have otherwise, given that the spouse making the alimony payment would “recoup” a portion of the payment in the form of a tax deduction and yet the spouse receiving payment would not be subject to an equivalent tax obligation due to his or her lower tax bracket.  In many cases, this resulted in a “win-win” for the divorcing spouses, courtesy of the tax laws. However, with the elimination of the alimony deduction, this opportunity may be lost.

Moreover, in 2010 New York State passed legislation providing guidelines–including a mathematical formula–for calculating presumptive spousal maintenance obligations in divorce cases.   In part, this legislation was intended to create uniformity and consistency with respect to spousal maintenance awards and eliminate the “guess work” that previously went into making such determinations.  However, these presumptive calculations did not anticipate the recent tax law changes and therefore, the presumptive amounts resulting from applying these calculations may no longer be appropriate in many cases.

Further, in that the payment of spousal maintenance interacts with the calculation of presumptive child support pursuant to New York’s 1989 Child Support Standards Act, the potential uncertainty surrounding the determination of an appropriate level of spousal maintenance may have far-reaching implications to future divorces.

Elimination of the alimony deduction is not scheduled to take effect until January 1, 2019.  Consequently, anyone who enters into a legal Separation Agreement or is granted a final Judgment of Divorce on or before December 31, 2018, providing for the deduction/inclusion of alimony, will be “grandfathered” under the deductibility provisions of the prior law. The old rules will continue to apply to pre-January 1, 2019 Agreements or Judgments that provide for the deduction/inclusion of alimony.  Future modifications to such pre-January 1, 2019 Agreements or Judgments can continue to apply the old rules or can apply the new rules.

Similarly, anyone who has previously executed a Prenuptial Agreement that contemplates alimony payments based on the anticipated deduction/inclusion of these payments for tax purposes may wish to amend their agreement to more clearly address this potential issue.  

Given the approaching implementation date of the new alimony rules, there is presently a limited opportunity for anyone contemplating divorce to elect to address these issues and thereby continue to take advantage of the potential benefits of the present (soon to be former) tax treatment of alimony payments—rather than delaying until the new rules are in effect and not only losing the these potential benefits but dealing with the uncertainty that may result.

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