Tax Treatment of Spousal Maintenance II

January 23, 2018 by Brett Jones

Will the new federal tax law alter application of New York’s spousal maintenance formula?


Last month when we posted about the tax treatment of alimony (called “maintenance” in New York), the new federal tax bill had not yet passed in both houses of Congress. Now it is signed into law. Good news and bad news.


Good news first. When we wrote December’s post, any change in tax treatment of maintenance would have been effective January 1, 2018. However, that is not what happened. This month, the law is passed and its provisions on this subject are not effective until January of 2019. So we have a year during which at least this can be expected to happen: those who are helped by the new tax treatment will  be trying to delay their divorces and those who are hurt y the new tax treatment will be trying to accelerate their divorces.  


The bad news is the same as the good news. 2018 will be a year of struggle to speed up and slow down divorce negotiations: spouses who are served by the new law will want to delay their divorces and those who are served by the present law will want to finalize them. So which of these parties are you, a delayer or an accelerator?


Let’s look at how this works. A writer named Ethan Wolff-Mann wrote an article (which you can read here) identifying some of the variables that will be in play during 2018. He gives an example of  a soon-to-be ex spouse who will be paying $100,000 a year in maintenance under the old law. This “monied spouse” will get a deduction off the top so that, in the highest tax bracket of 40%, he or she is only out $60,000. On the other hand, the person receiving that $100,000 pays tax on it, so assuming a 15% tax rate, nets about $85,000.  


Now take the same example in 2019. If the paying spouse has the same out-of-pocket cost of $60,000, that would mean the receiving spouse gets the $60,000. Period. On that basis who loses and who wins? It is certainly possible to argue both spouses lose. Because of the non-deductibility and the decreased income, can it be argued the government wins? As we discussed last month, maybe the IRS.

Wolff-Mann goes farther, pointing out that states like New York that use formulas to calculate alimony may or may not change them to comport with the new federal law. New York’s formula is relatively new, having come into effect only two years ago. This leaves any adjustments to the courts for the time being. New York courts can deviate from the formula if its application produces results that are “unjust and inappropriate.” This invites courts to deviate from the formula and set payments that take into account the increases in cost to the paying  party and the net income to the receiver.


Will New York courts respond to that invitation? Wolff-Mann quotes a New York lawyer who says  that some will and some won’t. If this happens, two couples could be divorcing in the same court under different judges and get different results, even if, hypothetically, they agree to the very same settlement terms. This does nothing for consistency in the law (but it does make 2018 a year in which the self-determination available to parties who choose divorce mediation or collaborative divorce is even more attractive than usual, but that’s another point).  


Time will tell the impact of the new federal law on New York divorces. While the dust settles, advice of counsel will be even more important than usual  because, at the very least, this aspect of divorce is less predictable than previously.