Effective Jan. 1, 2019, maintenance payments are no longer tax deductible to the payer or taxable income to the payee.
The Tax Cuts and Jobs Act of 2017 took away the deductibility of the payments. This year, 2018, remains the last year to claim the deduction. As such, many family lawyers have seen a rash of filings earlier in the year, to have the divorce completed in 2018, so that the maintenance payments can still be deducted. Many family court clerks that I have spoken to also have noticed an increase in filings and demanding lawyers who are insistent that their cases be scheduled for final divorce this year, to allow for the deductibility of maintenance payments.
The real question though, is how much of a difference will it really make? Is it cause for panic? Is it going to change the divorce landscape forever? Is it really necessary to push every maintenance case through this year to take advantage of the deductibility of the payments? Do courts need to schedule more final hearings this year so that the cases can be completed?
Should courts waive the 120 day statutory waiting period on recently filed cases, to take advantage of the current tax laws that allow the maintenance payments to be deducted?
Let’s set a factual pattern.
David B. Karp, Marquette 1982, practices family law in Milwaukee with the law firm of Karp & Iancu, SC, where he concentrates his practice predominantly on family law matters.
Take a long-term marriage of 25 years. Both parties are 50 years old. The husband makes $150,000 gross annual income and the wife earns $50,000 gross annual income.
By running a tax support program at the starting point of 50 percent, maintenance would be $3,784 per month, husband to wife. Each party would have $5,973 per month in monthly net income for their expenses. The total net tax paid by the husband is $32,915 and the total net tax paid by the wife is $23,745. (See Example 1: Taxable Maintenance).
By comparison, next year, where the payments are no longer tax deductible or taxable income to the recipient, the amount necessary to get to 50 percent as the starting point for spousal support will be significantly reduced. Using the same tax program, at 50 percent, support would be set at $2,665 per month. Both parties would have $5,947 in available net income to live on, which is nearly identical to the tax program used where the payments were tax deductible to the payer and taxable income to the recipient.
However, the overall tax implications to the parties is significant. Without the ability to take the deduction for maintenance payments made, the husband now has a total net tax due of $46,660, nearly $14,000 more than when the payments were deductible to him. For the wife, it is the opposite. As the recipient, her net tax is reduced from $23,745 to $10,619, or $13,126 to her advantage. (See Example 2: Nontaxable Maintenance).
Adjustments Are Necessary
As we enter 2019, it will take some adjusting on all of our parts when negotiating maintenance settlements in a divorce.
It will be important for practitioners to remember, when running the tax programs, to classify the payments either as child support, or some other nontaxable support, to avoid making mistakes when calculating how much maintenance there should be in any particular case.
I don’t think it means the end of the world, but it does mean that all of us will need a period of adjustment and careful thought when calculating the proper amount to be paid in maintenance cases, with the knowledge and understanding that such payments, as of Jan. 1, 2019, are no longer deductible.
This article was originally published on the State Bar of Wisconsin’s Family Law Section Blog. Visit the State Bar sections or the Family Law Section web pages to learn more about the benefits of section membership.