By Adam T. Kronfeld of Duff & Kronfeld, P.C. posted in Family Law on Wednesday, January 17, 2018.
For over seventy years, federal tax law has allowed payors of spousal support to deduct every single dollar of payments from their gross income and has required recipients to declare those payments received as income. The clear policy reason was that payors should not be taxed on income that they received but were legally compelled to give away, and recipients should not receive income completely tax-free. By shifting the tax burden from the higher-earning spouse to the lower-earning spouse, because of the progressive nature of tax brackets, it also usually kept more money in the parties’ hands, as opposed to being taxed by the state and federal governments. As a practical matter, this scheme has made it easier for payor spouse to agree to pay support, knowing precisely what he or she would be giving away.
The so-called Tax Cuts and Jobs Act of 2017, which was signed into law in December 2017, reversed this seventy-year policy. Commencing with agreements and court orders entered into after December 31, 2018, a payor of spousal support cannot deduct any of his or her payments, and support is not taxable to the recipient. In other words, the payor spouse will pay support with “after-tax dollars” as opposed to “pre-tax dollars,” meaning more of the parties’ combined income will be subject to state and federal taxation. This change applies to all new agreements and orders commencing in 2019, as well as any modifications to pre-2019 orders that occur in or after 2019.
Family law attorneys expect that the changes will have a significant impact on the negotiation of spousal support agreements, as well as the presentation of spousal support cases in court. In cases where the higher-earning spouse is in a higher tax bracket, the change in the law means that there simply will be less money to go around. When there are fewer resources to divide, but financial needs remain the same, it will be more difficult for parties to agree on how those resources should be divided. Likewise, demonstrating the effect of a spousal support order in court may be more complicated, with some payors needing to retain financial experts to analyze and explain the tax implications of their support obligations.
Regardless of the long-term consequences, it is undoubtable that the next several years will find attorneys and divorcing parties having to adapt and develop new approaches to negotiating and litigating spousal support. If are subject to a current spousal support order that may be in effect after 2018, or if you anticipate a divorce that may not be final until after 2018, you should speak with an experienced family law attorney to discuss the impact that this new tax law may have on your spousal support obligation or entitlement.
If you have any questions or would like to discuss your legal matter with an attorney, please contact Duff & Kronfeld, P.C. for a complimentary, 30-minute consultation at (703) 591-7475.