Alimony After the 2017 Tax Code Changes
One of the givens for divorcing couples in the United States has always been the alimony is deducted from the payor’s income and includible in the recipient’s income for purposes of federal taxes. As James Nunn writes in this excellent blog posting, this structure provided some relief by way of a tax break for divorcing couples who would have to use the money that previously supported one household to support two separate households after a divorce. This worked because the recipient was often the lower income earner and would therefore pay less taxes on the income received as alimony than the higher income earner would have had it been includable in their income.
The Massachusetts Legislature used the tax treatment of alimony when drafting the 2011 Alimony Reform Act which stated that alimony should not generally be more than 30% to 35% of the difference between the parties’ incomes.
As of December 31, 2018, the federal Tax Cuts and Jobs Act of 2017 completely upended the way alimony is treated for federal tax purposes and eliminated the prior rule that alimony payments were deductible from the payor’s income and includable in the recipient’s income. This change in the federal tax code has made the percentages in the current Massachusetts Alimony Statute no longer fair or appropriate. The law is, however, still in force and theoretically the Probate and Family Court judges could use it in support of setting an order based on these old percentages.
The current consensus among most practitioners is that the new percentage range is likely somewhere between 23% and 28% of the difference in the parties’ incomes, but it’s not yet clear that the family court judges are in agreement with these parameters.
The Alimony Reform Act also contains language that says alimony should be based on the need of one party and the ability of the other to pay. Despite the fact that need has always been the touchstone of any alimony order the percentage guidelines provided an ascertainable standard that many litigants and lawyers relied on in resolving cases without the need of a trial on the issue of need.
This area of law which was previously settled is now in a time of upheaval and uncertainty. It’s not entirely clear how judges will handle these issues. If you are considering filing divorce or in the midst of a divorce you need to make sure that you align yourself with lawyers and tax professionals who understand the state of the law and how to develop a strategy that will ensure that the result is fair and equitable in light of these new changes.