The Tax Cuts and Jobs Act of 2017 (TCJA) is a 1,000-page law that made more changes to the US Tax Code than any tax law in the last three decades. One change that has received a lot of attention is the elimination of the alimony deduction.
Those who already have established alimony awards can breathe a sigh of relief, because the TCJA did not change the deductibility of that award. Only those alimony payments that are established on or after January 1, 2019 will be taxed to the payor. That is, if your separation agreement was final by December 31, 2018 or it is modified after that date, but specifically states that the alimony payments are to be treated as pre-TCJA, then the tax treatment of those alimony payments will not change.
The TCJA Increases the Family’s Taxes
payment of support from a spouse, who has the ability to pay, to a spouse in need of support for a reasonable length of time, under a court order.” M.G.L. Chapter 208 section 48.
By definition, the former spouse that earns more pays alimony. That spouse, the payor, is usually in a higher tax bracket than the former spouse receiving alimony — the payee. By allowing the higher earner to deduct alimony and the lower earner declaring it as income, the alimony payments are taxed at a lower tax bracket.
The payees, however, did not reliably report alimony as income, and the IRS missed out on taxing those payments if the payee didn’t report it on her taxes.
Now, future alimony awards will be taxed at the payor’s tax rate — in many cases, at a higher bracket. Therefore, more money from the former family unit will be going to the IRS.
Massachusetts Alimony Laws Have Not Changed
Although the court takes several factors into consideration, Massachusetts alimony law provides a guideline:
In other words, if one party makes $100,000 and the other makes $50,000, an alimony award should be 30 – 35% of $50,000 (the difference between the parties’ incomes). Whether it’s 30% or 35% or somewhere in-between depends on several factors. (the length of the marriage; the parties’ age, health, income, employability, and contribution to the marriage; the marital lifestyle; and more.)
That law (known as the Alimony Reform Act) was passed in 2011 and has not been changed since the TCJA. It assumes the deductibility of alimony payments, and therefore the change in the federal income tax code should change the 30-35% guideline.
To further complicate matters, Massachusetts still allows for alimony to be deductible.
How Does this Affect Massachusetts Alimony Awards?
If you have a current alimony payment, you need not worry that you will be paid less or taxed more. The federal alimony deduction remains in effect for you.
For future alimony payments, however, the future is not so clear.The Alimony Reform Act specifically allows for deviating from the guideline due to “tax considerations.” M.G.L. Chapter 53(e)(2) and the courts are likely to see many attorneys arguing for a deviation from the 30-35% guideline because of the TCJA changes.
Parties should be prepared to compare the net effect of the tax treatment of alimony before the TCJA and argue that a deviation would result in the same award after taxes. The unanswered question, however, is: Will Massachusetts courts deviate such that it will cost the payor the same amount, or result in the payee receiving the same amount?
Given the state of flux for alimony in Massachusetts, it’s important to seek reliable legal and tax advice before finalizing a separation agreement that includes alimony.