For at least 75 years, the Federal Tax Law has allowed parties who pay maintenance (formerly labeled alimony) to deduct those payments on their tax returns. The recipient spouse was therefore obligated to report the maintenance payment as income on his/her tax return. All that changed under the 2017 Federal Law (formally known as the Tax Cuts and Jobs Act or TCJA, which repealed those sections as to separation agreements and judgments of divorce signed after December 31, 2018. As a result, maintenance would no longer be deductible to the payor or income to the payee. As this was announced approximately a year ago, the effect created havoc among the matrimonial bar which attempted to interpret, reconcile and ultimately resolve all outstanding maintenance issues prior to December 31, 2018. Our office was personally involved in that frenzy of activity and actually signed two agreements late in the day on New Year’s Eve.
In response to the new law and in an attempt to mitigate the effect of the federal change, the New York Legislature recently enacted legislation. The new law provides that alimony or separate maintenance payments made under agreements signed after December 31, 2018 will be added to the payee’s federal adjusted gross income and deducted from the payor’s federal adjusted gross income. Therefore, a New York subtraction from income for payments that would have been federally deductible if not for the TCJA and the New York addition for payments that would have been federally taxable if not for the TCJA, will now be reported on form IT-225.
Section 11051 of the TCJA applies not only to payments made under divorce and separation agreements signed after December 31, 2018, but also to payments under instruments signed before that date and modified thereafter. Any documents executed after December 31, 2018 which modify prior agreements would come under the new law "if the modification expressly provides that the amendments made by the section apply to such modification." Conversely, the New York statute also has an exception and applies to payments made under a divorce or separation agreement executed after December 31, 2018 "and any divorce or separation instrument executed on or before such date and modified after such date if the modification expressly provides that the amendments made by the section apply to such modification."
It remains to be seen if one or both of these laws remain in effect. For now, the state budget appears to have accomplished the goal to preserve some portion of the tax deductibility of maintenance payments. The laws and exceptions create many interesting tax issues and savings as well as loopholes that can be exploited if the drafter and or parties are aware of their options. All of these may be moot if either or both of the laws do not survive the test of time.
