If you’ve recently been divorced or are in the process of divorcing your spouse, you are likely aware of how intensely stressful negotiating a divorce settlement with your soon-to-be former spouse can be. Whatever the reasons for your divorce, it can feel emotionally overwhelming to process the myriad changes impacting your day-to-day existence while also attempting to make wise and strategic decisions that have the potential to shape your life for years to come.
It may be impossible to plan for every eventuality, especially while under the burden of such stress, but understanding how your divorce will impact your taxes can help to prevent any unwelcome surprises come tax season. And because federal and New York state tax laws differ on how they account for spousal maintenance – also known as alimony or spousal support – the tax implications of spousal maintenance can even impact how spousal maintenance itself is calculated.
Recent Changes in Tax Law
Relatively recent changes in federal tax law have changed the way spousal support is taxed by the IRS. Signed into law on December 22, 2017, the Tax Cuts and Jobs Acts (TCJA) significantly altered the way the IRS taxes spousal support. Previously, the Internal Revenue Service (IRS) allowed the spouse paying support to report spousal maintenance payments as a tax deduction. As such, the recipient was required to report and pay taxes on alimony payments as income. If you were divorced before January 1, 2019, that is still likely the case.
However, if your divorce was finalized on or after January 1, 2019, then the rules have – in effect – reversed. The paying spouse may no longer claim spousal maintenance as a tax deduction and the payee no longer needs to report those payments as income.
Tax Implications in New York State
New York state tax law, however, follows the previous federal model. New York Tax Law § 612(w) (2022) stipulates that alimony or spousal maintenance will be subtracted from the payors federal adjusted gross income whereas it will be added to the federal adjusted gross income of the payee. This means that if you are paying or receiving alimony, your federal and state taxes may be calculated differently.
How Taxes Impact New York Maintenance Guidelines
This discrepancy between federal and New York state tax law is also reflected in the New York maintenance guidelines, which do not explicitly account for the changes to federal tax law. Because the payor can no longer deduct payments from their income, they may ask the court to adjust maintenance levels downward to account for their higher tax burden. Conversely, a payee is likely to oppose any such reduction in their alimony award. Therefore, not only do you need to account of how spousal maintenance may impact your taxes, but the court may also take your potential tax burden into account when awarding spousal maintenance.
Spousal support in New York – like child support – is calculated according to a presumptive formula. Under Chapter 14, Article 13, Section 236 of the Domestic Relations Law, however, the court has some discretion to deviate from the formula and income cap if it finds that the maintenance obligation awarded according to the formula is “unjust or inappropriate.”
The court may adjust the amount and length of time that maintenance is awarded if it finds that the parties meet a list of mitigating circumstances, which include:
- Age and health of both parties
- Present and future earning capacity of both parties
- The need of one party to incur education or training expenses
- Consideration of child support
- Wasteful dissipation of marital property
- The existence and duration of a pre-marital joint household or a pre-divorce separate household
- Any acts by one party that inhibited or continue to inhibit a party’s earning capacity, including domestic violence
- Availability and cost of health insurance
- Care of children, stepchildren, disabled adult children or stepchildren, elderly parents or in-laws during the marriage that inhibits a party’s earning capacity
- Standard of living of parties established during marriage
- Reduced or lost earning capacity of payee as a result of forgone or delayed education or employment
- Tax consequences to each party
- Any other factor the court finds to be just and proper
Prior to the TCJA, the ability for the payor to claim spousal support payments as a tax deduction served as a tax incentive for the spouse paying maintenance to settle or agree to a higher award amount. As this is no longer the case, New York courts now have to contend with the new federal tax rules as one of the many factors that may determine spousal maintenance awards.
Other Tax Implications
In addition to taxes and spousal maintenance, there are other critical tax issues that can emerge during any divorce, including:
- Tax deductions for dependents
- Property tax and mortgage deductions
- Child support
- Tax implications and penalties resulting from equitable division of property
It is essential that you seek the guidance and advocacy of a reputable high-asset divorce attorney, especially if you are undergoing a high-asset divorce, who will know how to account for all potential tax implications.
How Samuelson Hause PLLC Can Help
Because of the complexity of navigating current New York maintenance guidelines in relation to state and federal tax law and because judges have significant discretion to consider such factors, it is critical that you have a knowledgeable and dedicated legal advocate who will help to protect your interests in court.
At Samuelson Hause PLLC, our experienced and compassionate divorce attorneys can help to ensure that every aspect of your divorce settlement is carefully considered, including taxes. With over 100 years of collective experience in family law, we understand what is necessary to achieve results for our clients.
If you are considering a divorce, contact us online or call us at (516) 584-4685 to schedule a consultation.