The U.S. tax code has long been a labyrinth of convoluted legal jargon that has left even the most astute of wanderers lost in its maze. Decades’ worth of opinions from the Tax Courts have served as guiding lighthouses to aid in navigating its many wayward roads , but with the recent passage of the “Tax Cuts and Jobs Act of 2017” the maze’s pattern has suddenly changed, potentially rendering those opinions null and void. One of the areas that has seemingly been flipped on its head by the tax code is Alimony or Spousal Maintenance (as it is called in New York).
Under the old code, maintenance awards were deductible to the payor and included as taxable income to the payee, which generally resulted in more money to be distributed to the payee. Why? Well the answer is best illustrated by way of example. Say the payor (the higher earning spouse) is obligated to pay maintenance in an amount of $30,000 per year to the payee (the lower earning spouse). The payor, who earns more is taxed at a much higher rater of 33% than the payee who is taxed at only 15%. Under the old code, the payor would be able to deduct the $30,000 and thus save on paying the 33% due in taxes on that amount for a total savings of $9,900. Meanwhile the $30,000 is included to the payee and taxed at the lower rate of 15% and the payee only owes taxes in the amount of $4,500. The parties have saved $5,400 by using the deduction. This deduction has served as a critical tool in negotiating prenuptial, separation and divorce agreements as it encourages the payment of more funds to the payee. New York’s recently amended law on maintenance guidelines went into effect on January 25, 2016 and was enacted based upon the presumption that the payor was entitled to deduct maintenance.
The new law under the Tax Cuts and Jobs Act of 2017 terminates this deduction, thereby reversing the current maintenance dynamic. In other words, the payor must now pay taxes on the maintenance award and the payee shall not be taxed on the money received. The new law will not go into effect until after December 31, 2018. Divorcing spouses in New York will soon be left to face a new maze where guideline amounts exist based upon a presumption that is no longer valid. Without suitable guidance, litigants will be left fighting over the proper amount of maintenance (a fight that the new maintenance guidelines had sought to put to rest). Dynamic problems require creative “outside the box” solutions. The attorneys at the Law Offices of Steven E. Rosenfeld, P.C. are here to guide you through this new and complicated frontier and insure that you make it out of the maze in one piece.