Good, simplified summary of the impact which the recent tax reform bill will have on divorces.
An important issue, but could add to the burden facing the Probate & Family Court.
Recently, Congress passed tax reform (known as the “Tax Cuts and Jobs Act”) which, in part, eliminated the alimony deduction for divorces entered after December 31, 2018. Alimony payments have historically been considered income to the recipient/payee and have been deductible by the payor if certain requirements are met (i.e., the payment must be in cash or by check/money order; the payment must be made under a divorce or separation instrument; the instrument must not designate the payment as being non-includable and/or non-deductible; the ex-spouses cannot be members of the same household; the payment cannot continue after the death of the recipient/payee; and the payment cannot be designated as child support). See I.R.S. Code §§ 61(a)(8); 62(a)(10); 71 & 215.
Since ex-spouses often have differing income levels, with the payor typically earning more and paying taxes at a higher rate, the deductibility of alimony often allows the ex-spouses to have a resulting, greater cash flow. In turn, this makes it easier for the ex-spouses to pay for the increased expenses associated with two households.
For divorces after December 31, 2018, alimony will no longer be deductible by the payor and will no longer be considered taxable income to the recipient/payee. But, for those divorced prior to that date, alimony will continue to be deductible (including subsequent modifications of alimony, unless expressly stated otherwise).
The elimination of the alimony deduction could encourage some to seek a divorce before the expiration date of December 31, 2018 (and some would say there is a certain irony that a decision by a Republican-led Congress, the party which has for years espoused “family values,” might actually end up promoting divorces). It will also likely make future divorce negotiations more contentious and complicated given the key role the deduction played in helping to maximize the available cash flow to ex-spouses. Finally, the elimination of the deduction raises conflicts with the statutory scheme for determining divorce-based support in Massachusetts. For example, the Alimony Reform Act, namely M.G.L. ch. 208 §53(b), suggests that, in part, a range of 30%-35% of the differences in the ex-spouses’ gross incomes is an appropriate amount of alimony. Although not specifically stated in the Reform Act, this range was based on historical, percentage levels of deductible alimony. Additionally, the recently revised Child Support Guidelines (2017) also seem to encourage the use of a higher amount of “unallocated support” (i.e., a combination of alimony and child support) which is considered deductible alimony instead of nondeductible child support. See Guidelines (2017), § II(A)(2) (relationship to alimony payments). See also Delong vs. Comm’r, T.C. Memo. 2013-70 (2013).
(Note, this blog represents the opinions of Sandy Durland, partner at Schmidt & Federico, P.C.)
The Business Insider magazine compiled information from various social scientists and has come up with seven factors that purportedly will predict a divorce:
In a previous post, we noted how the House recently passed a version of a tax reform bill which, if enacted into law, would eliminate the tax deduction for alimony payments in divorces and separation agreements executed after December 31, 2017. On November 9, 2017, however, the Senate responded by filing its own version of a tax reform bill. The Senate bill rejected the House’s proposal to eliminate the alimony tax deduction and would leave the current law regarding the deductibility of alimony payments intact. Since there are widespread consequences flowing from the potential loss in the deductibility for alimony warrants, the tax reform debate in Congress warrants continued and close monitoring.
On November 2, 2017, the House Ways and Means Committee issued H.R.1, called the “Tax Cuts and Jobs Act,” a bill over 400 pages long, which contains provisions that will likely have a profound impact on family law practitioners, as it would eliminate the tax deductions relating to payments that some people are required to make to their ex-spouses. It would also eliminate the inclusion of such payments as income to the recipient ex-spouse. These payments, typically codified in a divorce or separation agreement and incorporated into a divorce judgment, are different than child support, are typically paid at a rate of 30%-35% of gross income and are referred to as either alimony or spousal support. While it remains to be seen what the Senate bill will provide, if the proposed legislation passes the House as written, it would apply to all divorce judgments entered after December 31, 2017. More importantly, since the avoidance or reduction of taxes is often a key element in a divorce negotiation for the higher income and/or wealthier ex-spouse, this legislation could make settlement discussions much more contentious and difficult. For example, for a person in the 33% federal tax bracket, the proposed House bill would increase the cost of their alimony or spousal support payments by nearly 50%. So, while the goal of the House bill may have been to generally simplify income taxes, this proposed legislation could likely complicate divorces and may actually increase litigation.
We are pleased to announce that, this year, the following attorneys in our firm were named to the Massachusetts “Super Lawyers” list, an honor limited to approximately 5% of the lawyers state-wide:
• Mary H Schmidt, estate planning & probate (an honoree since 2004);
• Phyllis Federico, family law (an honoree since 2004);
• Sandy Durland, family law (an honoree since 2006);
• Bill Schmidt, estate planning & probate (an honoree since 2005); and
• Jennifer Sevigney Durand, family law (an honoree since 2015).
Two weeks ago, the Massachusetts Supreme Judicial Court issued a decision in a case which addressed the question of whether and under what circumstances the Alimony Reform Act (M.G.L. ch. 208 §§48-55), permits a judge to award alimony based on a percentage of the paying spouse’s income. Given the importance of the issue, Sandy Durland and Glenn Schley, prepared and filed an amici curiae brief (literally, a “friend of the court” brief), where they offered their analysis on the issue.
In their brief, Sandy and Glenn argued that alimony awards must be narrowly tailored to the specific financial circumstances of the parties involved. Notwithstanding the statutory overhaul under the Alimony Reform Act, they argued that the basic tenets of alimony awards did not change and that any award of alimony must still be based upon a determination of the specific needs of the recipient spouse and the income and ability of the payor spouse to meet those needs at the time of the award. But, when there are certain narrow or “special circumstances,” where a traditional alimony payment will not appropriately address the specific needs and financial circumstances of the parties, the Reform Act would permit alimony to be based solely on a percentage of the payor spouse’s income.
On September 25, 2017, in Young vs. Young, the S.J.C. largely agreed with the approach suggested by Sandy and Glenn and, in a decision that continues to define alimony awards under the Alimony Reform Act, ruled that the husband (a senior executive at Fidelity Investments) will not have to pay 33% of his future income to his former wife. The S.J.C. noted that there may be special circumstances, such as where the payor spouse’s income is highly variable year-to-year and affects the spouse’s ability to pay, where an alimony award based on a percentage of the payor’s spouse’s income would be appropriate, so long as the percentage-based formula does not exceed the needs and marital lifestyle of the recipient spouse.
Here is a link to the case decision: http://law.justia.com/…/m…/supreme-court/2017/sjc-12240.html
Recently, the S.J.C. issued a decision, in George vs. George, which addressed the issue of whether a trial judge, on a complaint for modification of an alimony judgment that predated the Alimony Reform Act, may deviate from the durational limits of M.G.L. ch 208 §49, on the basis that the alimony provisions of the parties’ separation agreement, which were merged into the judgment, were inextricably connected with the property division provisions of the agreement, which survived the judgment.
In the decision, the S.J.C. engaged in a discussion regarding deviations “in the interests of justice,” after proof “by preponderance of the evidence” (see page 9 of the decision). Section 49(e) states that, “unless the payor and recipient agree otherwise, general term alimony may be modified in duration or amount upon a material change of circumstances warranting modification.” Section 49(f)(2) goes on to say that the court may grant a recipient an extension of an existing alimony order for good cause shown; provided, however, that in granting an extension, the court shall enter written findings of (i) a material change in circumstances that occurred after entry of the alimony judgment; and (ii) reasons for the extension that are supported by clear and convincing evidence.”
In George, the S.J.C. acknowledged the clear and convincing standard at the bottom of page 5 (onto page 6), namely that under “the act, general term alimony may be modified in amount and duration upon a material change of circumstance.” Yet, it then concluded at Page 9, that “the recipient spouse bears the burden of proving by a preponderance of the evidence that deviation beyond the presumptive termination date is ‘required in the interests of justice’” pursuant to Section 49(b).
It is uncertain how that portion of the George decision and Section 49(f)(2) can be read together. In this respect, it may be that the S.J.C. is mistaken.
We are pleased to announce that Phyllis Federico, was honored last month at the 2016 Top Women of Law event, which celebrates exceptional women lawyers who have made tremendous professional strides and demonstrated great accomplishments in the legal field. The annual award honors and highlights women who are pioneers, educators, trailblazers and role models – a description which fits Phyllis perfectly.