The Tax Cut and Jobs Act of 2017 (“TCJA”) has been a hot topic of discussion among divorce attorneys since it was signed into law last year. TCJA will have significant implications for divorcing couples—although the exact effects are still largely unknown. Most divorce attorneys have concluded that TCJA will lower spousal maintenance payments; however, I’m interested in another—even more likely, but much less-noticed—effect of the law.
TCJA created a new tax scheme relating to spousal maintenance. Prior to this legislation (and unless otherwise agreed to by the parties), the payor of spousal maintenance could deduct those payments, while the recipient was required to include those payments as taxable income. However, TCJA reversed this rule for agreements signed in 2019 and beyond. Going forward, the payor of spousal maintenance can no longer deduct those payments, and the recipient will no longer have to include them as income.
New York Courts use established formulas to determine the “presumptive” (or correct) amount of spousal maintenance awards. And it’s not at all clear how—or whether—the courts will adjust those awards to account for the new law. Thus, many divorce attorneys are now speculating that payors of spousal maintenance may argue that they cannot afford awards based on these formulas in light of the loss of their tax deduction—leading couples to negotiate for lower payments. I agree with this prediction—but, to me, it’s not the most interesting effect TCJA will have.
Instead, I’m more interested in the uncertainty couples will face under the new tax law. Since couples can’t know whether, or how, courts will take TCJA’s tax treatment of spousal maintenance into consideration when determining such awards, I believe that we will soon see a rise in divorces initiated by to-be-recipients of spousal maintenance. This is because to-be-recipients of spousal maintenance will now be the beneficiary of tax-free income—making their post-divorce financial future less intimidating. In response, in light of the uncertainty they face in the courts, to-be-payors will be reluctant to go to trial on spousal maintenance issues—because each dollar the courts order them to pay has just become more expensive. Instead, payors will be increasingly motivated to reach an agreement outside of court.
That’s why TCJA will lead more couples to seek out-of-court agreements through mediation. Mediation gives couples more control over whether, and how, spousal maintenance should be adjusted to take TCJA into account—adjustments that a court may or may not make. To learn more about how mediation can help couples manage the financial implications of TCJA, you can schedule an initial consultation by calling me at (646) 491-9008 or emailing me at email@example.com.