New tax bill & spousal maintenance
May 2018 | Alison Leigh Epilone, Esq.In 2016, I wrote an article about the New Maintenance Law (Assembly Bill A7645-2015), which revised the Temporary Maintenance provisions originally enacted in 2010. Additionally, the New Maintenance Law provided a formula for post-divorce maintenance. That legislation became effective for cases filed after January 23, 2016.
However, where are we now given the recent tax bill passed in December 2017? Honestly, we do not know. Prior IRS rules and regulations allowed for the payor of spousal maintenance (also known as “alimony”) to deduct the payments on his/her federal income tax return – these same rules and regulations required recipients of spousal maintenance to claim the payments as income.
This is no longer the case. As it relates to spousal maintenance, the new tax bill no longer requires a spousal maintenance recipient to claim payments received as income for anyone who divorces or signs a separation agreement after December 31, 2018; more importantly, the new bill no longer allows the maintenance payor to take the deduction for such payments. Anyone who is already divorced and/or has signed separation agreements will not be affected by this recent change (for the most part).
The deductibility of spousal maintenance has always been a crucial negotiation tool utilized by litigants and attorneys, even after the issuance of the Maintenance Guidelines.
For example, crafty lawyers representing maintenance payors would offer to pay a higher amount of spousal maintenance and a lower amount of child support since child support is not deductible.
This would satisfy the non-monied spouse because the total support obligation was sufficient and, in turn, would satisfy the monied spouse because they would receive the deduction on their returns. With the new tax bill, this negotiation tactic is going to fall by the wayside. Moreover, the amount of spousal maintenance that is going to be paid is likely to decrease.
So, what about those persons who signed a separation agreement, for example, in 2012? If those persons now seek a divorce and their Judgment of Divorce is signed after December 31, 2018, their previously negotiated separation agreement, as it relates to spousal maintenance (which likely contemplated the deductibility of maintenance), may now be substantially modified by the new tax bill.
An important question then must be asked: What will the New York State Legislature do with the fairly newly-enacted maintenance formula with this newly enacted tax bill? Did the Legislature consider the deductibility when it enacted the formula? After a quick read of the 2015 Legislative Report, I did not come across the words “tax” or “deductible” anywhere; so again, we do not know.
What does this new tax bill mean for persons contemplating divorce/separation and/or those currently in the process? We do know this:
1. If you are settled, agreement signed and awaiting for the final divorce packet to be filed with the Court and are the maintenance payor, make sure you get the packet in immediately; you’ll want to make sure the Judgment of Divorce is signed in 2018.
2. If you are settled, agreement signed and awaiting for the final divorce packet to be filed with the Court and are the maintenance recipient, you may want to take your time submitting the final packet.
3. If you are currently in the divorce/separation process and spousal maintenance is going to be paid (or received), make sure the amount contemplates the new tax bill prohibiting the deduction and/or inclusion.
4. If you have a previously signed separation agreement that contains provisions for the payment of spousal maintenance and do plan on filing for divorce in the near future, you may need to consider modifying the agreement prior to finalizing your divorce; you will likely lose your spousal maintenance payment deduction if the divorce is not signed before December 31, 2018.
5. If you have a previously signed separation agreement that contains provisions for the receipt of spousal maintenance and do plan on filing for divorce in the near future, you may want to hold off a little longer so the divorce is signed after December 31, 2018.
If you have any questions about the matters discussed in this article, please contact your Legal Service Plan’s National Legal Office at 800-292-8063 or 631-231-1450.
Sources:
1. New York Domestic Relations Law § 236B
2. https://www.usnews.com/news/best-states/new-york/articles/2017-12-22/the-latest-trump-signed-tax-bill-scraps-alimony-deduction
However, where are we now given the recent tax bill passed in December 2017? Honestly, we do not know. Prior IRS rules and regulations allowed for the payor of spousal maintenance (also known as “alimony”) to deduct the payments on his/her federal income tax return – these same rules and regulations required recipients of spousal maintenance to claim the payments as income.
This is no longer the case. As it relates to spousal maintenance, the new tax bill no longer requires a spousal maintenance recipient to claim payments received as income for anyone who divorces or signs a separation agreement after December 31, 2018; more importantly, the new bill no longer allows the maintenance payor to take the deduction for such payments. Anyone who is already divorced and/or has signed separation agreements will not be affected by this recent change (for the most part).
The deductibility of spousal maintenance has always been a crucial negotiation tool utilized by litigants and attorneys, even after the issuance of the Maintenance Guidelines.
For example, crafty lawyers representing maintenance payors would offer to pay a higher amount of spousal maintenance and a lower amount of child support since child support is not deductible.
This would satisfy the non-monied spouse because the total support obligation was sufficient and, in turn, would satisfy the monied spouse because they would receive the deduction on their returns. With the new tax bill, this negotiation tactic is going to fall by the wayside. Moreover, the amount of spousal maintenance that is going to be paid is likely to decrease.
So, what about those persons who signed a separation agreement, for example, in 2012? If those persons now seek a divorce and their Judgment of Divorce is signed after December 31, 2018, their previously negotiated separation agreement, as it relates to spousal maintenance (which likely contemplated the deductibility of maintenance), may now be substantially modified by the new tax bill.
An important question then must be asked: What will the New York State Legislature do with the fairly newly-enacted maintenance formula with this newly enacted tax bill? Did the Legislature consider the deductibility when it enacted the formula? After a quick read of the 2015 Legislative Report, I did not come across the words “tax” or “deductible” anywhere; so again, we do not know.
What does this new tax bill mean for persons contemplating divorce/separation and/or those currently in the process? We do know this:
1. If you are settled, agreement signed and awaiting for the final divorce packet to be filed with the Court and are the maintenance payor, make sure you get the packet in immediately; you’ll want to make sure the Judgment of Divorce is signed in 2018.
2. If you are settled, agreement signed and awaiting for the final divorce packet to be filed with the Court and are the maintenance recipient, you may want to take your time submitting the final packet.
3. If you are currently in the divorce/separation process and spousal maintenance is going to be paid (or received), make sure the amount contemplates the new tax bill prohibiting the deduction and/or inclusion.
4. If you have a previously signed separation agreement that contains provisions for the payment of spousal maintenance and do plan on filing for divorce in the near future, you may need to consider modifying the agreement prior to finalizing your divorce; you will likely lose your spousal maintenance payment deduction if the divorce is not signed before December 31, 2018.
5. If you have a previously signed separation agreement that contains provisions for the receipt of spousal maintenance and do plan on filing for divorce in the near future, you may want to hold off a little longer so the divorce is signed after December 31, 2018.
If you have any questions about the matters discussed in this article, please contact your Legal Service Plan’s National Legal Office at 800-292-8063 or 631-231-1450.
Sources:
1. New York Domestic Relations Law § 236B
2. https://www.usnews.com/news/best-states/new-york/articles/2017-12-22/the-latest-trump-signed-tax-bill-scraps-alimony-deduction