While changes in federal taxation of spousal support have been well-publicized, less well-known is how New York taxes spousal support payments. Many people assume New York and IRS tax rules are identical. Before the Tax Cuts & Jobs Act of 2017 (“TCJA”) was enacted, New York and Federal law were the same. Since then, however, the State has decided not to follow Federal law. The result is added complexity for parties negotiating alimony or separate maintenance payments.
New York versus Federal tax rules
As discussed in a previous post, the TCJA made a substantial change to Federal tax law. The law shifted responsibility for paying the tax on support payments from the payee (i.e., the spouse receiving the support) to the payor (the one paying support). This went into effect for all agreements signed after December 31, 2018.
New York opted not to follow the TCJA tax rules regarding the tax deductibility of spousal support for State tax purposes. Accordingly, spousal support is tax-deductible on a New York State and local level. As such, New York has required taxpayers, when calculating their New York adjusted gross income (NYAGI) to:
- “Subtract from your federal adjusted gross income (FAGI) any applicable alimony or separate maintenance payments you made in the tax year, and
- Add to FAGI any applicable alimony or separate maintenance payments you received in the tax year.”
Essentially, New York and Federal law are the exact opposite. New York allows the payor to take a tax deduction for the amount of the spousal support paid, while the IRS doesn’t allow the payor to take it.
Negotiating spousal support
The TCJA complicated spousal support negotiations because a big incentive to get the payor spouse to settle spousal support was its tax-deductibility. Previously, a higher-income spouse may have been willing to pay more spousal support because he or she would receive the benefit of a tax deduction. That is no longer possible. Courts and parties are starting to grapple with how this should affect negotiations. Since New York law gives a spousal support tax deduction to the payor, that must also be factored into the support award. At this time, courts seem to prefer to keep the recipient spouse in the same position as he or she would have been in but for the tax law change, rather than to pass the full cost resulting from the tax law change on to him or her. In other words, the Federal tax the recipient spouse would have paid on the spousal support income if the law hadn’t changed can now be deducted from the payor’s payment.
Ultimately, the parties should consult an experienced attorney and financial expert to negotiate the best result under opposing federal and state laws. Please feel free to contact us to learn how we can help you achieve a positive result in your matter.