As you know, an important component of many divorces is the extent to which one person will pay alimony (also called spousal maintenance) to the other — if at all. This often comes up when one spouse has taken time out of the workforce, or when his or her standard of living is likely to decrease significantly upon divorce.
The purpose of spousal support is to provide the payee support and give that spouse time to retool so he or she can become self-supporting. It may give the payee time to go back to school, get retrained, or to gain new skills. New York actually has a guideline formula for determining the amount — and duration — of maintenance called the New York State Maintenance Guideline Law (MGL). Courts use it as a guide, but they have room for discretion to consider a number of factors, such as the age and health of the parties, and the employability of both.
One such factor listed in the statute is “the tax consequences to each party.” For many years, spousal maintenance was tax-deductible (at the state and federal level) for the payor and taxable to the recipient. This made more money available to the family overall since it was presumed that the payor was at a higher tax bracket.
This all changed recently — the new federal tax law, officially called the Tax Cuts and Jobs Act (TCJA), eliminated this tax benefit for divorce settlement agreements signed after December 31, 2018. (Note: If your separation or divorce agreement was signed before December 31, 2018, the old rules still apply and your agreement is valid.)
This means that, for settlement agreements signed or divorce judgments awarded in 2019 and after, spousal support will be treated like child support going forward — it comes from after-tax dollars. The net effect is that taxes are paid at the higher tax bracket, and less cash is available to the family.
We have yet to see how this will influence divorce settlement negotiations, but I feel certain that it will.
Meanwhile, there are two things that you should be aware of.
First, this change only affects federal taxes, not state and local taxes. And New York State has not changed its laws — so in cases where spousal support is being paid pursuant to an agreement signed in 2019 and after, federal tax on that support amount will be payable by the payor, and state and local tax will be payable by the payee.
In other words, if the amount of spousal support is $60,000 per year, that $60,000 will not be deductible from the payor’s income nor taxable to the payee for federal taxes, but it WILL be tax-deductible from the payor’s income and taxable to the payee for state and local taxes. Very confusing!!! While I always suggest that clients talk to their accountants before signing, this year getting advice from a reputable CPA will be more important than ever.
Another consideration is that the New York MGL drafters did not contemplate this shift in the tax law when it was drafted. So, while the MGL is an important guide, it is all the more important for you and your spouse to come up with a plan that works for your family based upon your real budgets. We will see if the state legislature will adjust it to follow the federal law, but so far, that has not happened.
Mediation and collaborative law are two methods of coming up with solutions that fit the specific needs and circumstances (and budget) of your unique family. They allow you to find novel solutions to difficult problems, like adjusting your agreement for the financial impact of this new law. To learn more about what you can expect from your 2019 divorce, contact me.
Joy S. Rosenthal, Esq.
Rosenthal Law & Mediation
225 Broadway, Suite 2605
New York, New York 10007