While many aspects of family law may stay the same over the years, certain components may also need to be changed to adhere to the evolving nature of life in the United States. Recently, the federal tax law was changed, with the change in the taxation of maintenance (alimony) payments that came into effect on the 1st of January 2019. According to the rules of this new law, maintenance payments delivered from one spouse to another can no longer be classed as a tax deduction for the payor. Additionally, the payee no longer has to count those payments as taxable income. What this means is that there can be greater resistance to the payment of maintenance than before.
The last update in the New York State maintenance guidelines was made at the time that maintenance payments were tax deductible to the payor and taxable income to the payee. These maintenance guidelines are still in place, and at as of the time of this blog have still not been revised by the New York State legislature. The law still reflects an environment wherein maintenance is tax deductible to the payor, and taxable income for the recipient. Accordingly the courts may decide to deviate from the guidelines for maintenance based on this change in the taxability, now that the rules are different, as deviation may be required to creating an agreement that’s fair for both parties.
The Changing Tax Deduction Laws
The new law applies to all divorces finalized after December 31st, 2018. This means that any divorce taking place this year will not come with the benefits of previous tax allowances. In the past, the tax deductions that payors could acquire on maintenance had frequently acted as an incentive, meaning that spouses required to pay maintenance in divorces could deliver more dollars to their ex, and still benefit from a tax reduction. The tax deduction allowed some top earners to earn a significant amount of cash. For some divorce mediators and attorneys such as myself, the promise of tax relief was enough to prevent a divorce from going to trial. However, now, according to a study into the American Academy of Matrimonial lawyers, 95% believe that there will be a change to how divorces are settled.
The new rules around tax deductibility could sometimes mean that more money will be going into taxes than into the bank accounts of people getting divorced, at least from the perspective of the monied spouse. For instance, in the case of Wisseman v. Wisseman, 2019 NY Slip Op 29092 (Supreme Court Dutchess County), we can see an excellent example of how the considerations of tax deductibility might come into place in today’s divorces. The courts in this case found that the husband’s annual income (which was more than double that of the wife’s), would require a maintenance payments of approximately $512.54 per month according to the maintenance guidelines.
The husband in this case argued that he should be allowed to pay less maintenance, because he would not be able to deduct those payments from his taxable income. He requested that because his federal tax rate was 22%, his statutory calculation would need to be reduced by 22%. However, the parties also agreed that the wife’s tax rate needed to be considered (12%). The wife argued that a reduction of her award by 22% would lead to a much lower net payment for her than the guidelines dictate.
Deviating from the Guidelines
Now that the maintenance guidelines and the tax situation around divorce no longer align, the court may need to deviate from the rules that they have previously followed to determine what would be “fair” in a divorce. In the case above, the courts determined that since the wife would have been forced to pay an extra 12% taxes on the maintenance she received, her maintenance would need to be reduced by 12%. The husband was also seeking a 22% reduction, but the court chose to give a reduction according to the wife’s tax bracket instead, as it was the solution that they deemed to be fair.
Crucially, there are many reasons that the courts may choose to deviate from the guidelines typically followed when giving orders for maintenance and equitable distribution. Tax consequences are just one of the reasons why the courts of New York might choose to move away from the guidelines. The original reason that the tax law allowed the paying spouse to deduct maintenance from their income, was to ensure that there was more disposable income available for both of the parties involved in the divorce. Now that those circumstances have changed, the courts have more factors to consider when figuring out how to award maintenance to parties in a divorce.
If you would like to learn more about the various things that a court may consider during a divorce, read through the blogs on this website for help and insights. On the other hand, if you would like to discuss the details of your case, contact my office today to arrange a consultation to suit you. Your first thirty minutes are free. Couples interested in using me as their mediator should schedule their free initial consultation together. Contact us over the phone at (516) 333-6555 or use one of our contact forms.