Since the first go round of the proposed massive revisions to the tax code were announced several weeks ago, matrimonial lawyers, litigants, accountants, etc. have been in a veritable tizzy over the prospect that one of the modifications was to eliminate the deductibility of alimony payments by the payer and the includability of the payments by the recipient as income, for all agreements or judgments after December 31, 2017. The angst was with good cause because that provision of the tax code allowed the payer to pay more alimony to the recipient because he did not have to pay taxes on the income used to pay alimony, therefore, creating greater net after tax cash flow for him/her. On the recipient side, because she/he often paid taxes at a lower rate, it made sense all the way around, except maybe to Uncle Sam who was losing the higher tax revenue by the shifting of income from the higher taxed payer to the lower taxed recipient.
When the Senate version of the tax reform bill was announced, this issue was not addressed at all, causing some hope, albeit short lived because the bill that came out of the reconciliation process had the elimination of the deduction, but not at the end of 2017, but rather, the end of 2018. This was explained yesterday in a blog posted by my partner, Mark Ashton, of our Chester County, Pennsylvania Office, on our Pennsylvania Family Law Blog, entitled Alimony About to Experience an Untimely Death. The House just voted to pass the tax bill and the Senate is not far behind.
The bottom line is that the new tax laws will provide less to go around for both sides of the equation. Old “rules of thumb” will go out the window. Child support guidelines will have to be adjusted as they are based upon combined net income. Because combined net income will be less, especially in places like New Jersey that are hit hard by the new laws eliminating some of the property tax and other deductions, will child support go down too? Will this lead to a race to the courthouse in 2019 to adjust child support because whether or not you are able to deduct alimony, will tax increases be considered a change of circumstances?
I would think that savvy people who are contemplating divorce might see the change in the law as a catalyst to finally pull the plug on a marriage to take advantage of the tax benefits of alimony in their final year. People embroiled in an ongoing divorce may finally agree on something, i.e. to get the divorce over with before the end of 2018 for the same reason. Only time will tell whether the unintended consequence of the so called tax reform will cause 2018 to be the Year of the Divorce. Either way, we are all going to have to get used to this paradigm shift in figuring out what a fair alimony amount should be given the change in the law.
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