The federal Tax Cuts and Jobs Act of 2017 was the most sweeping piece of tax legislation in decades, reducing individual tax rates and significantly cutting corporate tax rates.
But the law also eliminated many tax breaks, and that has created havoc for the family law bar because of the changed treatment of alimony.
The Massachusetts Alimony Reform Act of 2011 set clear parameters for calculating alimony payments, providing that "the amount of alimony should generally not exceed the recipient's need or 30 to 35 percent of the difference between the parties' gross incomes."
That range made sense when alimony was deductible by the paying spouse and includable as income by the receiving spouse. The paying spouse was generally in a higher tax bracket, and having money move to the lower paid spouse for tax purposes meant there was a little more after-tax income to divvy up.
But as of Jan. 1, 2019, alimony is no longer deductible. That means the divorcing couple's overall after-tax income is now reduced. But it also means that adhering to a 30-35 percent range results in the additional tax burden hitting only the paying spouse. In fact, that spouse could end up with a smaller share of the couple's after-tax income than the receiving spouse, which is clearly not what the Legislature intended.
The change in the income tax treatment of alimony creates other problems as well. For example, it impacts modifications of pre-TCJA agreements. Parties seeking to modify an alimony arrangement that predates the act can continue to have the agreement subject to the old rules, or specifically designate it as governed by the TCJA. This creates another issue for parties to haggle over, making modifications even more difficult to work out.
The bar has acted quickly on the issue: the Family Law Joint Legislative Task Force has already obtained a proposal from a CPA that the alimony law be amended to provide for a payment range of 23 to 28 percent, unless alimony payments again become tax-deductible to the paying spouse. The proposal has been unanimously endorsed by the Massachusetts Bar Association's...