Divorce Mediation

Alimony Deduction Finished. What to Do?

After months of uncertainty and differences between the House and Senate versions of the proposed new tax law, we now have a final decision on how it will deal with alimony. The tax deduction for  alimony is unchanged until January 1, 2019. After that alimony will no longer be tax deductible. An agreement or judgment providing for alimony and alimony deduction prior to that date will be governed by current law. Most people paying or receiving alimony will want to finalize their Agreement before the new law takes effect.

There could be substantial consequences if this deadline is not considered. I have seen some popular articles that promote the idea that the only people who are effected by the new law are people paying alimony. Any experienced divorce lawyer or divorce mediator knows that the loss of the tax deduction will affect payors and recipients of alimony. Payors of alimony will not be willing to pay as much if they can’t deduct it which means alimony recipients will suffer. It is also likely that Judges will take into account the new law when making alimony decisions and that means less alimony for recipients. For most couples their collective tax obligation is lower if support is structured as alimony. The recipient is usually content to pay the taxes because he or she is usually in a lower tax bracket than the person making the payments.

In states like Massachusetts the alimony laws will likely be changed. I suspect that the reason an extra year was given before the change in the tax treatment would be effective had to do with giving the states time to revise their laws and alimony guidelines. Currently in Massachusetts the amount of alimony is supposed to reflect the need of the recipient and should not exceed 30-35% of the difference between the parties’ income. There is a provision in MGL Ch. 208 Section 53 that gives the judge discretion to consider tax implications when setting an alimony order.

Presumably most judges will take the new tax law into account as a matter of course when setting alimony orders after January 1, 2019, but there should be a revision of the statute to change the percentages in the current law so that there is a presumption that alimony won’t be excessive. If a judge were to order alimony at 35% of the difference between parties’ income when alimony is not tax deductible, the result would be much higher than current norms and could result in considerable litigation and unfairness.

My understanding is that all agreements entered into prior to January 1, 2019 are “grandfathered” in the sense that they will always be interpreted according to the current tax law, as will modifications of those agreements or judgments, however the language of any new agreements should carefully track the language of the new tax law to make sure they qualify. There will likely be regulations promulgated under the new law which lawyers will have to be careful to consult.

There will be plenty of work for divorce lawyers, divorce mediators, tax professionals and financial planners who are  trying to fully understand the impact of this change and properly reflect it in their work product. Other than that, I see no benefit to anyone in this change. The tax savings for the government is minimal compared to the terrible impact this will have on people already struggling to manage their finances in the aftermath of a divorce. There are worse things about the new tax law to complain about certainly, but I will save that for another day.

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