The clock is ticking; 2018 will be the last year maintenance in New York (alimony virtually everywhere else will be deductible. The recently enacted tax bill eliminates the tax deduction for the payment of alimony.
Historically, maintenance has been deductible to the paying spouse and includable as income to the recipient spouse. Child support, on the other hand, was a tax neutral payment and is neither deductible to the payor nor taxable to the recipient.
By definition, the spouse paying maintenance would be in higher tax bracket then the recipient spouse. Because of this, attorneys were able to leverage the difference in tax rates between the monied and non-monied spouses to, in part, put more money in the hands of the non-monied spouse at a nominal cost to the payor spouse.
Suppose, for example, a high earning husband in the 50% tax bracket and is paying his wife $100,000 a year in alimony. On a cash flow basis he would be paying maintenance of $100,000, but, because of the tax deduction, his spousal support would actually only cost him on $50,000 after the payment is tax impacted (@50% tax rate on a $100,000 payment).
On the other hand, the wife would receive the $100,000, but after tax (assuming a 25% tax bracket) she would be left with $75,000. This tax impacted payment often was called the “divorce subsidy” because the spouse receiving maintenance payment would be receiving more in after-tax dollars than the spouse was actually paying.
This ability to leverage the parties’ tax rates was particularly beneficial when the payor spouse was paying child in addition to maintenance. The divorce subsidy could be extended by apportioning some part of the non-taxable child support payment taxable maintenance. The payments could be “netted” up so that payor would be in the same place if the payment were tax neutral. The recipient, on the other hand, had more cash in hand
The Future of Spousal Maintenance in New York
New York’s maintenance guidelines, like the Child Support guidelines, are used to calculate the payments based on the parties’ income before consideration of federal and state taxes. It can reasonably be anticipated that the maintenance guidelines will need to be revised to account for the loss of the tax deduction.
Alternatively, if the guidelines are not amended, the parties will be left to negotiate how to tax impact the maintenance payments. Any maintenance guideline calculation would have to be discounted to take into account the tax consequences.
In addition, while maintenance will be deductible to parties with agreements in place before December 31, 2018, any modifications after January 1, 2019, would eliminate the tax deduction. In this case, a party, who lost a job and is seeking a downward modification of a maintenance payment, may get a reduction in the amount of the payment, but lose the ability to deduct it.
I can predict that in December there will be a mad rush to settle cases where maintenance is contemplated.
If you have questions about maintenance in New York, contact us or call us directly at 212-683-9551.